Monday, August 15, 2011

How A Recession Rewires Your Tolerance For Risk

NPR Staff

This past week the stock market took a serious nose-dive, the Dow Jones Industrial Average dropped 500 points on Thursday. As a result, investors across the board have been flocking to safer investments. Now you might expect older people to cash out in order to save their nest eggs — but young people? The standard investment advice would be to hold tight. Turns out, they're actually the ones fleeing from stocks the fastest…..
"It takes about thirty years to go away, but then it does…..
What happens in the years following a depression or recession, Malmendier explains, is that the people affected actually think bad events are more likely to happen than they are. So if you give them a 50-50 gamble, they think it is really more like a 90-10 proposition and walk away."You attach the wrong probabilities to the outcome," she says……..
"This is drastic because despite all those ups and downs I think most financial economists would agree that a young person who is saving for the long-run should just have a broadly diversified portfolio, and this is not likely to happen at least for the next coming years," she says. "So the younger generation is really losing out in terms of the long-term preparation for when they have high expenses, family, ultimately retirement even."…..

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