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Macroeconomic experiences and risk taking of euro area households

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  • Ehrmann, Michael
  • Ampudia, Miguel

Abstract

This paper studies to what extent the experiences of households shape their willingness to take financial risks. It follows the methodology of Malmendier and Nagel (2011) and applies it to a novel data set on household finances covering euro area households. We show that experienced stock market returns matter in a statistically significant and economically substantial fashion: better experiences increase the financial risk households are willing to take as well as stock market participation along the intensive and the extensive margin. We find that more distant experiences receive a somewhat lower (but still substantial) weight than the corresponding findings suggest for the United States. Furthermore, there are additional effects stemming from the experience of extreme stock market downturns. Households in countries that witnessed a particularly severe 2008 stock market crash give substantially more weight to the most recent experience, suggesting that in these countries an even more pronounced underinvestment in the stock market should be expected in the years to come. The evidence highlights the relevance of personal experiences for household behaviour. JEL Classification: D03, D14, D83, G11

Suggested Citation

  • Ehrmann, Michael & Ampudia, Miguel, 2014. "Macroeconomic experiences and risk taking of euro area households," Working Paper Series 1652, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20141652
    Note: 203739
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    References listed on IDEAS

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    More about this item

    Keywords

    household finance; learning; portfolio choice; rare disasters; risk-taking behavior;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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