Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/154085
Authors: 
Ampudia, Miguel
Ehrmann, Michael
Year of Publication: 
2014
Series/Report no.: 
ECB Working Paper 1652
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.
Subjects: 
household finance
learning
portfolio choice
rare disasters
risk-taking behavior
JEL: 
D03
D14
D83
G11
Document Type: 
Working Paper

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