Sunday, February 1, 2009

Will the Current Financial Crisis Affect Future Investment Behavior?

A new study by Stefan Nagel and Ulrike Malmendier, "Depression Babies: How Our Economic Experiences Affect Investment Behavior," indicates that it probably will shape our future willingness to accept risk.

The implications of this study—especially for how things might play out in the next few years—are notable. Precisely because difficult economic times make investors less willing to take risk, bad experiences can lead to a vicious circle. Investors, skittish because of recent —and in many cases massive—losses, can be loathe to put money back into markets even after they stabilize. “This can amplify recessionary effects, and prolong economic downturns,” said Nagel.

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