Personal Experience and Savings Behaviour

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An individual’s decision to consume less and save more reveals information about his or her expectations about future events as well as heterogeneous preferences. Savings may increase, for example, if a household plans high expenditures in the future (house building, education of children) or wants to hedge against negative shocks (illness, unemployment of the breadwinner). We expect a reduction in savings activity when a saver is confronted with new reasons for fearing financial losses in approaching economic or political crises (inflation, bankruptcy, war, or expropriation by an authoritarian regime). It is also possible that the introduction of new or additional transfer payments (pensions, unemployment benefits) crowds out private savings. We will study on which information savers built their optimistic or pessimistic expectations. Do the rely on information provided by the media or do the react to direct economic signals such as changes in the real interest rate? Based on the seminal work of Malmendier and Nagel we assume that a saver’s personal experience has an import impact on his or her individual expectations and savings decisions. People who experienced high inflation in their past, for example, might have higher inflation expectations than people who only know price stability. Our period of observation from 1871 to 1970 comprise many major shocks that might have influenced the savings behaviour of people who personally experienced them. We observe two World Wars and a number of large and widespread economic crises that severely harmed German savers. Just think about the “Gründerkrise” in the 1870s, the hyperinflation in 1923, the currency reform of 1948, the Great Depression, and other smaller crises such as the stock market crash in 1907. Studying savings behaviour based on individual saving books, household books, diaries and other available archival material over this long time span, therefore gives us ideal conditions to study how personal experience have shaped individual savings decisions.