Long-Term Consequences of Growing up in a Recession on Risk Preferences
Risk preferences play a fundamental role in individuals’ economic decision-making. We examine whether the historical macroeconomic environment shapes individuals’ willingness to take risks. Using nationally representative samples from Japan and exploiting regional variation in economic conditions, we find that men who experienced severe economic conditions in youth are more risk averse in adulthood and the effect is long-lasting. In addition, those men are less likely to be self-employed and they have longer tenure, which are consistent with elevated risk aversion. This study highlights the importance of experience at a critical period of life on the formation of risk preferences.
This research utilizes the micro data from the Preference Parameters Study of Osaka University’s 21st Century COE Program ‘Behavioral Macro-Dynamics Based on Surveys and Experiments’, its Global COE project ‘Human Behavior and Socioeconomic Dynamics’ and JSPS KAKENHI 15H05728 ‘Behavioral-Economic Analysis of Long-Run Stagnation.’ I thank David Card, Takeshi Murooka, and Masayuki Yagasaki for their suggestions. All remaining errors are my own. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.