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

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