"Learning from Experience: How Experience Effects Impact Decision Making" by Ulrike Malmendier

2020 Fathauer Lecture in Political Economy: Ulrike Malmendier, University of California, Berkeley.

Macro-shocks such as the Great Depression or the 2008 Financial Crisis have motivated a wave of new models of belief formation, which aim to capture two elements. The first is the overweighting of recent realizations. When predicting future returns in the stock, housing or other asset markets, investors appear to overly rely on their observations of those markets in recent months or years. The second element is the long-lasting effect of crisis experiences and the associated systematic cross-sectional differences. As conveyed by the notion of "depression babies'' or the "deep scars'' of the 2008 financial crisis, macro-economic shocks alter investment and consumption behavior for decades to come. Moreover, younger cohorts tend to react significantly more strongly than older cohorts. Models of experience effects naturally generate both the overweighting of recent experiences and the long-lasting effects of lifetime experiences. We introduce the concept of experience-based learning and survey its applications in macro-finance.

Established in 1982 and endowed in 1996 by Isabel and Walter Fathauer, the Lecture brings internationally known scholars to the University of Arizona's Eller College of Management. More than 200 business and community leaders, students, and other community members attend the free public event each year.