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

50 Pages Posted: 9 Jun 2013 Last revised: 6 Apr 2016

See all articles by Samuli Knüpfer

Samuli Knüpfer

BI Norwegian Business School; Research Institute of Industrial Economics (IFN)

Elias Henrikki Rantapuska

Aalto University

Matti Sarvimäki

Aalto University - Department of Economics; Government of the Republic of Finland - VATT Institute for Economic Research

Date Written: February 15, 2016

Abstract

Formative experiences are a natural candidate for explaining heterogeneity in portfolio choice. However, identifying their impact is challenging because experiences can correlate with unobservables and they may lead to changes in wealth and other determinants of portfolio choice. We overcome these challenges by tracing the long-run impact of the Finnish Great Depression in the early 1990s on investment in risky assets. Plausibly exogenous variation in workers’ exposure to the depression allows us to identify the effects, whereas a new estimation approach makes addressing wealth and income effects possible. We find that workers who experienced adverse labor market conditions during the depression 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 accumulation were unaffected by the experiences. The consequences of experiences travel in social networks: individuals whose neighbors and family members experienced adverse circumstances also avoid risky investments.

Keywords: Portfolio choice, stock market participation, experiences, unemployment

JEL Classification: D31, E21, G11

Suggested Citation

Knüpfer, Samuli and Rantapuska, Elias Henrikki and Sarvimäki, Matti, Formative Experiences and Portfolio Choice: Evidence from the Finnish Great Depression (February 15, 2016). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2275930 or http://dx.doi.org/10.2139/ssrn.2275930

Samuli Knüpfer (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

HOME PAGE: http://www.samuliknupfer.com

Research Institute of Industrial Economics (IFN)

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Elias Henrikki Rantapuska

Aalto University ( email )

P.O. Box 21210
Helsinki, 00101
Finland

Matti Sarvimäki

Aalto University - Department of Economics ( email )

PO Box 1210
FI-00101 Helsinki
Finland

HOME PAGE: http://www.aalto-econ.fi/sarvimaki

Government of the Republic of Finland - VATT Institute for Economic Research ( email )

Arkadiankatu 7
P.O Box 1279
Helsinki, FIN-00531
Finland

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