The Long-Lasting Effects of Living under Communism on Attitudes towards Financial Markets

84 Pages Posted: 25 Feb 2020

See all articles by Christine Laudenbach

Christine Laudenbach

Goethe University Frankfurt

Ulrike Malmendier

University of California, Berkeley - Department of Economics; University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)

Alexandra Niessen-Ruenzi

University of Mannheim - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: January 7, 2020

Abstract

We analyze the long-term effects of living under communism and its anticapitalist doctrine on households' financial investment decisions and attitudes towards financial markets. Utilizing comprehensive German brokerage data and bank data, we show that, decades after Reunification, East Germans still invest significantly less in the stock market than West Germans. Consistent with communist friends-and-foes propaganda, East Germans are more likely to hold stocks of companies from communist countries (China, Russia, Vietnam) and of state-owned companies, and are unlikely to invest in American companies and the financial industry. Effects are stronger for individuals exposed to "positive emotional tagging", e. g., those living in celebrated showcase cities. Effects reverse for individuals with negative experiences, e.g., environmental pollution, religious oppression, or lack of (Western) TV entertainment. Election years trigger further divergence of East and West Germans. We provide evidence of negative welfare consequences due to less diversified portfolios, higher-fee products, and lower risk-adjusted returns.

Keywords: Capital markets, Communism, Memory, Emotional tagging, Stock-market participation

JEL Classification: D03, D14, D83, D84, E21, G11

Suggested Citation

Laudenbach, Christine and Malmendier, Ulrike and Niessen-Ruenzi, Alexandra, The Long-Lasting Effects of Living under Communism on Attitudes towards Financial Markets (January 7, 2020). Available at SSRN: https://ssrn.com/abstract=3526926 or http://dx.doi.org/10.2139/ssrn.3526926

Christine Laudenbach (Contact Author)

Goethe University Frankfurt ( email )

Gr├╝neburgplatz 1
Frankfurt, 60323
Germany

Ulrike Malmendier

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
(510) 642-8724 (Phone)
(510) 642-6615 (Fax)

HOME PAGE: http://www.econ.berkeley.edu/~ulrike/

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

HOME PAGE: http://www.iza.org/en/webcontent/personnel/photos/index_html?key=918

Alexandra Niessen-Ruenzi

University of Mannheim - Department of Finance ( email )

Mannheim, 68131
Germany

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