Once Bitten, Twice Shy: Trusting the Stock Market in the Aftermath of the Financial Crisis

We study how personal experiences of different degrees affect future investment decisions and risk taking. Personal experiences derive from investments in retail banks that defaulted in the aftermath of the financial crisis. We classify the degree of experiences into first-hand experiences from personal losses, second-hand experiences from the losses of close family members, and third-hand experiences from living in municipalities where banks defaulted. To disentangle the effect of personal experiences from the confounding wealth shock our identification strategy relies on the decision to keep or rebalance unexpected inheritances of stocks. We find that thirdhand experiences result in marginally lower future risk taking. Second-hand experiences have a relatively stronger negative effect, while the effect of first-hand experiences on future risk taking is strongly negative. Overall, our results demonstrate that personal experiences explain substantial heterogeneity in individuals’ investment decisions.

• Hard copies of the paper will be provided in the seminar.

This event is an Erasmus Finance Seminar. The Erasmus Finance Seminar series brings prominent researchers in Finance from all over the world to Rotterdam.