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Investment Behaviour and Risk-Taking in Canada Essay (Article)

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Updated: Apr 5th, 2021

Depression Babies: Do Macroeconomic Experiences Affect Risk Taking?

What is the issue the authors are dealing with and why is it important?

The authors of the given research are interested in the investigation of the impact the negative experience might have on persons behavior and his/her desire and willingness to accept financial risks. The fact is that the negative experience might result in the significant deterioration of a persons attitude towards financial issues. That is why the authors tend to determine the scale of the given problem.

To be more convincing, they use the data related to the Great Depression as this period of time could be characterized by the great losses and numerous problems resulting from the failures of some investments. The researchers take Survey of Consumer Finances from 1960-2007 and try to analyze the behavior of people who suffered the negative aftermath of the Great Depression (Malmendier and Nagel 374). The given research has the great practical use. The fact is that the current situation could also be characterized by the financial crisis. The ability of people to pass through the period of change and obtain some new skills is crucial for the further evolution of the financial sector. That is why the given investigation is very important and should be given great attention.

Why do macroeconomists make the assumption that risk preferences are constant across time?

Researching the problem, Malmendier and Nagel agree with the assumption that risk preferences remain constant across time (374). This statement is based on the data obtained from the times of Great Depression. Macroeconomists tend to prove the idea that peoples preferences related to the given aspect do not change in the course of time. If to analyze this statement, it is possible to understand the idea which conditions the given assumption. The fact is that the instinct for self-preservation is one of the basic components of the human nature. Individuals try to act in the way which will guarantee the better outcomes and help to avoid some accidents.

Nevertheless, the standard approach and model assume that individuals will incorporate and analyze the existing historical data to create the most efficient pattern that will help them to survive and meet new challenges. In other words, a person will use the same methods his/her predecessors used to avoid great losses and guarantee survival especially if the given approach was successful. That is why the given assumption becomes understandable.

What is the evidence that suggests that risk preferences evolve at the individual level?

However, there is also the idea opposite to the above-mentioned one. It states that risk preferences do change over time, and this process could be considered a normal response to the evolution of society, market and world. Guiso, Sapienza, Zingales are also sure that the given tendency exists and could be taken as the main trend of the modern society (4). They conduct a study to prove this assumption and conclude that the peculiarities of the modern market and the evolution of peoples mentality result in the appearance of the practice.

Nowadays, people tend not just to use already existing approaches, but to create the new ones which could be efficient under the existing conditions and guarantee positive outcomes. Moreover, the evolution of science promoted the increased popularity of various consultants who are able to provide a person with the appropriate solution.

Yet, this tendency could be evidenced by a number of real-life examples.

What type of data did Malmandier and Nagel use in their empirical work?

In their research, the authors use the data obtained from the Survey of Consumers Finances from 1960-2007 (Malmendier and Nagel 375). The choice of the given source is predetermined by the character of the research and the authors goal. The fact is that to investigate the main peculiarities of peoples behavior it is crucial to understand how they spent money and what actions they performed to survive in terms of crisis.

That is why the relevant and credible statistical data is essential for the precise investigation of the main trends. Moreover, using the given source, the authors also obtain the possibility to work with the proven data which could contribute to the researchs use. Malmendier and Nagel try to analyze the main showings related to the peoples financial behavior in terms of deep financial crisis (376). It could help them to trace the changes and make certain conclusions important or their work.

What regressions or econometric tests are the authors conducting?

In general, the authors try to determine the changes in people mentality caused by the great financial crisis and other stressful situations. One should realize the fact that these alterations could be observed only in comparison with peoples actions under the normal conditions. For this reason, Malmendier and Nagel take statistical data related to the period of Great depression and tend to trace the changes in financial risk taking (379).

Besides, analyzing this very data, the authors come to a certain conclusion which results from the above -mentioned comparison and proves their main hypothesis. In other words, they use a simple and efficient pattern to investigate the given issue and provide credible conclusions. Yet, I believe that the authors equitation and suggestion related to the alterations of financial risk taking should be considered the most important one as it provides the basis for the whole research.

What are the authors’ findings?

Having conducted the research, the authors managed to prove their statement. They found that risky situations and asset returns experienced by a person have a great impact on his/her willingness and readiness to accept financial risks or perform some actions which might result in the financial losses. Moreover, people who have the positive experience related to financial operations demonstrate higher tolerance to this sort of risk, and they could participate in the stock market. Moreover, Malmendier and Nagel conclude that individuals are more concerned about recent returns than about distant realizations (413).

However, the previous negative experience still might have some impact on their financial behavior and whole life. Therefore, it is crucial to continue the investigation of the given issue to obtain the clear image of the possible aftermath of the modern financial crisis and mitigate some negative consequences. Finally, the authors are sure that there are some changes in the traditional patterns used to respond to the financial crisis and save some costs. It evidences the complexity of the issue and conditions the possibility of further alterations.

Reinforcement Learning and Savings Behavior

What is the issue the authors are dealing with and why is it important?

The authors of the paper tend to investigate the question of saving decisions. They revolve around the main aspects of the given process and suggest their own ideas related to the factors which might impact these decisions. Choi, Laibson, Madrian and Metrick state that some individual investors might over-extrapolate from their personal experience while considering a certain question (2515). In this regard, the researchers also investigate the impact the competence, knowledge and previous experiences might have on specialists and what role investing skills play while accepting some decision.

Moreover, they also provide the analysis of the possible applications of reinforcement learning to improve the competence in the given sphere and guarantee positive outcomes. The given issue could be considered topical especially in terms of the financial crisis. People suffering from its aftermath should consider the main aspects of investors financial preferences and make certain decisions resting on the given data. Finally, the authors also show numerous implications for this data which increases the practical use of the given paper. it should be analyzed to obtain the clear image of the major concerns of saving behavior.

What is reinforcement learning?

Reinforcement learning is a type of machine learning which implies the usage of special devices and software to determine the ideal behavior within a specific context and obtain the best outcomes. The popularity of the given approach is explained by the great positive impact it has on the understanding of certain process and creation of the appropriate solution. An investigation devoted to the given issue states that application of the reinforcement learning could help to increase the level of performance at least twice (“Reinforcement Learning” para. 5).

Moreover, it allows a device or software agent to learn a certain behavior and apply it to similar situations. For instance, this very approach could be used to analyze a complex financial situation and create the most appropriate strategy needed to attain success. In terms of crisis, software might process a number of factors and stressors and provide a person with the solution needed to avoid problems and obtain benefits.

What data do the authors use in their empirical work?

One should realize the fact that to obtain the clear vision of the problem and accomplish its precise investigation the authors should also use the credible statistical data related to savings behavior and it major concerns. For this reason, they use the data which comes from the large benefits record-keeping firm (Choi, Laibson, Madrian and Metrick 2521). There is the information related to the functioning of five various companies that could be used for the given research.

The data contains the full description of the nature of every transaction made by these firms at a certain period of time. Moreover, the statistics related to the most active employees gender, age, hire date, compensation, etc. was also used in the given paper. In these regards, the authors were able to use the relevant information to make certain assumptions and conduct their empirical research. Finally, the given approach to data selection contributes to the increased credibility of the whole paper.

What regressions or econometric tests are the authors conducting?

The authors of the research are interested in the determination of the relations between previous experience, investing skills, etc. and the saving behavior. That is why their approach is aimed at the examination of a certain behavior and the factors that might impact it. In other words, researchers analyze the data obtained from the credible sources and highlight certain aspects of behavior which could be important for the research.

Then they tend to assess these points in terms of some personal employees experiences and their approach to risk saving behavior. Additionally, consideration of investing skills and experiences is also crucial. Choi, Laibson, Madrian and Metrick obtain results that could prove their hypothesis and serve as the ground for their conclusions. The idea of the great impact of previous experiences on private investors saving decisions could be considered the most important one as it help to realize the main tendencies peculiar to the modern world.

What are the authors’ findings?

In the course of the investigation the authors find that investors try to use the same patterns which have already guaranteed them positive results (Choi, Laibson, Madrian and Metrick 2534). At the same time, they tend to avoid practices that resulted in returns. This behavior could not be explained by some accepted models but it results from the individuals personal preferences. Moreover, a naive reinforcement learning could also play a significant role in the formation of certain behavioral patterns and the further evolution of persons preferences.

The authors also find that application of this sort of learning could be considered dangerous under some conditions as it poses a threat to the development of various strategies and skills. Altogether, Choi, Laibson, Madrian and Metrick manage to prove their idea and underline the great importance of some personal factors that might impact the persons life and condition the significant changes of the current financial situation (Choi, Laibson, Madrian and Metrick 2533).

Investment Behaviour in Canada

Are Canadians saving enough for retirement?

Retirement is an important period of time which should be planned before. It is obvious that a person should save some costs and guarantee the positive conditions. However, there are numerous problems related to the given issue. When investigating peculiarities of Canadians savings for retirement, a certain lack of costs should be admitted (McCarthy para. 5). Statistics related to the last 10 years state that there is a certain retirement-income crisis that requires some actions (Messakar para. 4).

Moreover, maximum annual contribution to programs that could help to guarantee wellbeing does not change greatly in 10 years. In 2015 it was $1,861 while in 2010 it is about $2,163 (Messakar para. 7). considering the rate of inflation and the world financial crisis the sum is not enough to avoid poverty. That is why a serious problem in the given sphere could be observed.

Are there significant differences in investment behavior among different generations in Canada?

Continuing investigation of the question of investment behavior, the significant differences between the representatives of various age groups could be admitted. The fact is that elderly people have experienced numerous stressful situations and have the negative attitude towards some risky affairs including investments (McCarthy para. 5). They prefer to use their costs to guarantee comfortable circumstances.

Moreover, numerous investigators admit the lack of trust towards financial institutions demonstrated by this age group. At the same time, younger population could be characterized by the risky investment behavior conditioned by the peculiarities of the modern age and the attempts to promote financial investments. That is why there is a great gap between older and younger groups of population which result from the existence of the negative experience related to previous failures and stressful situations. The given gap is expected to become even bigger.

Is there any evidence to suggest that Canadians exhibit reinforcement-learning behaviour when they make their own saving decisions?

The recent financial crisis and its aftermath triggered the significant reconsideration of the approaches used to manage finances and make certain saving decisions. At the moment, the bigger part of the population of Canada is concerned about their future and tend to choose the model which could help them to save costs and obtain some incomes. Yet, the strangle of technologies promote the popularity of reinforcement learning as the way to make a certain decision. The fact is that at the moment, the level of trust towards technologies and the given approach is especially high among young generation. They tend to use the innovational approaches while planning their future and managing costs. In these regards, there is the tendency towards the further increase of the given approachs popularity (“Reinforcement Learning” para. 11).

Works Cited

Choi, James, David Laibson, Brigette Madrian and Andrew Metrick. “Reinforcement Learning and Savings Behavior.” Journal of Finance, 64.6 (2009): 2515-2534. Web.

Guiso, Luigi, Paola Sapienza, and Luigi Zingales. . 2014. Web.

Malmendier Ulrike and Stefan Nagel. “Depression Babies: Do Macroeconomic experiences affect risk taking?” The Quarterly Journal of Economics, 126.1 (2011): 373-416. Web.

McCarthy, Shawn. . 2016. Web.

Messakar, Derek. Evidence from Canadian Tax Records. 2015. Web.

. n.d. Web.

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