Formative Experiences and Portfolio Choice: Evidence from the Finnish Great Depression

Abstract

We trace the impact of formative experiences on portfolio choice. Plausibly exogenous variation in workers’ exposure to a depression allows us to identify the effects and a new estimation approach makes addressing wealth and income effects possible. We find that adversely affected workers are less likely to invest in risky assets. This result is robust to a number of control variables and it holds for individuals whose income, employment, and wealth were unaffected. The effects travel through social networks: individuals whose neighbors and family members experienced adverse circumstances also avoid risky investments.

Social Capital and Stock Market Participation via Technologies: The Role of Households’ Risk Attitude and Cognitive Ability

“…This conjecture is supported by several proposed explanations in the literature contemplating the role of participation costs in solving this puzzle [17,[20][21][22][23][24][25][26]. Moreover, scholars also reflected on behavioral approaches such as risk attitude [15,[27][28][29][30][31][32][33]; cognitive ability of households such as financial awareness [34], financial literacy [35], and IQ [36]; and sociological aspects including social interaction [5,8,12], trust [7,11] and shared vision [6,9,10,13]. This study reflects on the articles, considering risk attitude, cognitive ability, and sociological factors to explain the puzzle in stock market participation from the recommended journals in finance such as the Journal of Finance, Journal of Financial Economics, Review of Financial Studies, and Review of Finance.…”

“…This idea is another essential proposition since social capital is an emerging research topic to explain the behavioral finance and can make contributions to the existing body of knowledge on household finance. This conjecture is also motivated from the studies of Hong et al [5], Georgarakos and Pasini [8], and Campbell et al [12] about structural social capital, Guiso et al [7], Georgarakos and Inderst [51], and Balloch et al [11] about relational social capital, and Brown et al [6], Kaustia and Knüpfer [9], Hvide and Ö stberg [10], and KnÜ Pfer et al [13] about cognitive social capital to explain stock market participation. Figure 2 shows the second proposition of this study considering risk attitude to infer the existing relationship between the structural social capital and stock market participation.…”

“…Kaustia and Knüpfer [9] analyzed peer performance while the co-worker's investment decision is considered in the study of Hvide and Ö stberg [10] to explain stock market participation. KnÜ Pfer et al [13] traced the impact of formative experiences of neighbors and family members to explain the phenomenon. The previous studies about shared visions are in line with the study of As the Figure 3 showed, the third proposition is the consideration of risk attitude, since it is a variable that is caused by trust which can directly impact the stock market participation of households.…”

“…However, the coworkers' activity in the stock market cannot influence the improvement of the quality of investment decisions of an individual [10]. Recently, KnÜPfer et al [13] traced the impact of formative experiences on portfolio choice and conjectured that individuals whose neighbors and family members experienced adverse circumstances also avoid risky investments.…”

“…In effect, there is progress in exploring and explaining the rationality behind investor decision making through behavioral finance [4]. The previous studies on investment decision, particularly in stock market participation, have focused on solving the participation puzzle by linking social factors [5][6][7][8][9][10][11][12][13].…”