Stefan Nagel Says Not to Lean Too Much on Experience

How do you think the 2007–10 financial crisis and past decade have affected investors?

If one takes a lesson from what we have studied so far, it’s that the financial crisis will broadly influence the overall degree of pessimism people have. This is particularly true for people who were young at the time of the crisis.

The younger generation has had the relatively biggest drop when it comes to who’s holding stocks and stock mutual funds. Some of this has been offset by rising stock markets, but the crisis is going to have a long-lasting effect. If a young person has been strongly impressed by only a few years, it can hurt his investing.

This group will also be affected by the decade’s interest rates. Older people may view the low rates in recent years as unusual compared with their experience, but to younger people these low rates may seem quite normal. And the young could well be right. Over hundreds of years, there have been extended periods when interest rates were low for a long time.

There’s a tendency for people to lean too much on what they have seen, as opposed to on the historical record or economic models, or whatever one might use to come to an objective assessment. I grew up in Germany and remember my grandparents talking about the hyperinflation of the 1920s. That’s one of the things that led me to study these sorts of questions. But I’ve learned that it’s important to look at the bigger picture, not just the past five or 10 years—or your own limited experience.

Stefan Nagel is Fama Family Professor of Finance at Chicago Booth.