Will Recession Forever Scar Young Investors?

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My latest column on Money & Your Mind over at SmartMoney.com:

People who lived through the Great Depression were shaped thoroughly by the experience — so much so that many of them never gave up habits of extreme thrift, aversion to financial risk and even hoarding behavior.

As we begin the long climb out of the Great Recession, a question presents itself: How will this experience shape this generation’s minds and habits going forward?

A pair of recent studies may shed some light. The cognitive effects of financial shocks are long-lasting — and for those who go through them in early adulthood, can shape one’s entire outlook on life.

The studies look at how “Depression babies” — people who came of age during the Great Depression — invested when they reached midlife, and at how economic shocks shape people’s assumptions about the world.

Yes, the availability bias plays a large role.

When we see bad stock returns, and when we think the world is unfair, we retreat from economic risk taking. And we’re particularly affected if these things happen when we’re young.