The Kids Are Risk Averse: Will the Recession Scar Gen Y?

Last Updated Aug 19, 2011 6:24 AM EDT

With markets panicking on fears of a double dip recession, it's clear that the current economic doldrums are some of the longest and deepest in years. So what effect are these years of high unemployment and grim economic prospects having on the generation of young people unlucky enough to come of age in them?

Previous research has shown that beginning your career during a recession has lingering negative effects. An analysis out of Yale found young people who begin working in a downturn lose, on average, $100,000 in earnings due to starting at a disadvantage. The same national study also showed that young people who experience periods of unemployment early in their careers were at a higher risk of depression later in their lives.

Now, as if those studies weren't enough to lower you mood, another analysis out of Stanford suggests that in addition to other scars, the recession will affect how Gen Y does business in the future. The study by Stefan Nagel and Ulrike Malmendier, of Stanford's Graduate School of Business and UC Berkeley respectively, confirms a piece of conventional wisdom that was previously unverified by science -- experiencing hard economic times in your youth affects your attitude towards investing for decades, decreasing your appetite for risk. (Of course, says your grandmother, as she reuses her tea bag and hordes her pennies!)

The Stanford Knowledgebase reports the study's methodology and broad conclusions:
To test their hypothesis, Nagel and Malmendier took 40 years of cross-section data on household asset allocation from the Survey of Consumer Finances, and extracted portfolio allocations, risk aversion metrics, and stock-market participation. They controlled the model to eliminate differences due to demographics, wealth, income, and other variables.

What they found was instructive. Individuals who had experienced high stock-market returns throughout their lives were less risk adverse, were more likely to participate in the stock market, and more inclined to invest a higher percentage of their wealth in stock. Alternatively, those who experienced high inflation were less likely to invest assets in bonds, preferring inflation-proof cash-like investments.
Looking more closely at the figures, the researchers also found that young people were more strongly affected by tough economic times, as were those who experienced trouble more recently, both suggesting that today's youth, so called Gen Y, will be most strongly affected by the economic gloom and market volatility.

And if you're thinking this is perhaps risk aversion is just the right lesson to take from the current economic crisis, Nagel and Malmendier beg to disagree. Instead they see the likely outcome of early exposure to economic woes as a "vicious cycle," where,
Investors, skittish because of recent -- and in many cases massive -- losses, can be loathe to put money back into markets even after they stabilize. "This can amplify recessionary effects, and prolong economic downturns," said Nagel.
Shell-shocked young people might do the stock market no good by fearing to invest, but the case could also be made that they'll also harm their own prospects in business. Commentators have already pegged the current crop of young people as essentially conservative -- having been sheltered and managed by their parents they're not too keen on ambiguity and risk to start with and have no interest in exploding the system, preferring to simply prosper within a world order than has previously been pretty kind to them.

Add to this sensible but less than trail-blazing worldview a few recessionary scars, and it's possible to wonder if we'll have any disruptive, risk-big-win-big business leaders in a few decades time. Do you think the current recession will affect Gen Y long-term?

Read More on BNET: (Image courtesy of Flickr user buckle1535, CC 2.0)
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    Jessica lives in London where she works as a freelance writer with interests in green business and tech, management, and marketing.