Experience matters

There might be a link between the age gap in British politics and the recent sell-off in bond markets.

I’m thinking of here of some work by Ulrike Malmendier. She’s shown that experiences in our formative years influence our behaviour years afterwards. For example, investors who experienced recessions in their youth are less likely (pdf) to hold equities than otherwise similar people who didn’t, and company bosses (pdf) who experienced such recessions are less likely to use external finance.

Her work chimes with me. I’ve always been risk averse, perhaps because of circumstances I experienced in my youth.

Recent experiments by Pieran Jiao at Nuffield College Oxford have corroborated this. He gave some subjects a long position in shares and others a short position, and then showed them the share price moves, so that some saw profits and others losses. He then asked subjects to predict subsequent price moves. He found that those with long positions who had made a profit predicted higher future prices than others. Conversely, those with short positions who had made profits predicted further price declines.

All this suggests that direct experience of something slightly distorts our future expectations. Experience of profits makes us optimistic, whilst experience of recessions makes us gloomy. This fits with David Hume’s distinction between impressions – our “more lively” sensations induced by direct experience – and ideas which are “less lively.” Impressions impact our expectations more than mere ideas.

Which brings me to the bond sell-off. Older traders remember the “bond massacre” of 1994, when a widely-expected Fed tightening triggered a slump in the market. And they have a mental image that “normal” interest rates are much higher than they are now – because what’s normal is what we experienced in our impressionable years. These impressions make them jumpy when central bankers talk, however Delphicly, about normalizing monetary policy.

In fact, these being financial markets, it’s not necessary for traders to actually possess such impressions themselves. If they fear that others have such impressions – or fear that others will fear that others might have them and so on – that is enough for the prospect of normalization to cause a bond sell-off.

A similar mechanism might explain oldsters' greater antipathy to Labour. Jeremy Corbyn’s links with the IRA look awful to many people old enough to remember the Birmingham pub bombings, but they don’t mean much to voters who weren’t even of school age when the Good Friday agreement was signed. And Tory attempts to scare voters with talk of Labour’s fiscal incontinence resonate with those who remember Britain “going cap in hand to the IMF”, and who regard high borrowing costs as normal. But they just elicit a shrug to people with no such memories.

Even for the most historically aware of young voters, the Troubles and the IMF crisis are – in Hume’s words – faint ideas rather than the lively impressions they are to oldsters. That’s a significant difference.

Perhaps, therefore, there are genuine lasting differences between different age groups. And these arise in part because our beliefs are shaped not just by current reality but also, partly arbitrarily, by the past.

Comments

[Peter K.]

Any good histories of Britain “going cap in hand to the IMF”?

My cursory knowledge is that an advanced economy with its own currency/money tree wouldn't have to unless it *wanted to* for some reason.

Krugman on the record of bond vigilante attacks:

https://krugman.blogs.nytimes.com/2012/11/23/franc-thoughts-on-bond-vigilantes/

[Blissex]

«an advanced economy with its own currency/money tree wouldn't have to unless it *wanted to* for some reason»

Unless it “*wanted to*” pay for imports, that is :-)

The balance of trade and the foreign exchange value of the pound seems to have largely disappeared from the discussions of Economists. There must be a reason :-).

[Blissex]

«Older traders remember the “bond massacre” of 1994, when a widely-expected Fed tightening triggered a slump in the market.»

When the usual neoliberal Economists like B DeLong argue for a higher target inflation rate, while keeping nominal rates low, I try to remind them in comments that changes in the *real* interest rates too have a profound effect on bond valuations, and probably the central banks would have to backstop the losses of bondholders as well "absorb" their own. It is a matter of great delicacy.

[Steven Clarke]

Chris,

You have made the point before that the militancy of workers in the 1970s may have been caused by the passing of the generation of workers who lived through the depression years. That generation would have been too risk averse for pushing for wage rises, as in their youth they would have been grateful for steady work. Not so the younger cohort.

The younger generation now have grown up in the shadow of the post-2007 recession. Why has that not made them more politically risk averse?

[Jill Murphy]

I think kids who are told that £50k of private debt is a good thing and also have some vague idea about the BoE considering £400bn of QE also a good thing, aren't too worried about "the nation's overdraft", quite frankly.

And who can blame them, really?

[Blissex]

«the militancy of workers in the 1970s may have been caused by the passing of the generation of workers who lived through the depression years.»

That is indeed plausible. But in large part it was also that the oil price shock had reduced greatly the value of nominal wages, just like it happened after the 2008 debt crash; then the younger generation fought that by trying to shift the cost of higher oil prices onto the employers. In part it was because of "one more general strike" mindset from syndicalist-minded people, who were apparently funded and advised by the soviets, like the conservatives and their think-tanks were much more generously funded and "guided" by the americans (USA ambassadors and spies have colossal slush funds).

But we cannot forget that the 60s and 70s were in general a "countercultural" moment, across continental Europe, east and west too, not just the UK.
Sometimes I wondered how much of that "countercultural" moment was rooted in psychology, a consequence of the first couple decades of the constant terror of Mutural Assured Destruction and the repeated american attempts at setting up a first-strike position against the "godless" soviets.

[e]

@ Blissex It was a long time ago, but I think I'm right in saying, along with oil stoked inflation rate, many a 70's strike was secondary: a consequence of determination to maintain unskilled, semi-skilled and so on, wage rate differentials. In this sense very much of their time.

[David]

Maybe a false memory, but I remember most of the 1970 strikes arising purely from Government policy.
The unions were under attack, and employers were taking the advantage with legal backing. The strikes that lasted the longest, and made the most press, were not about pay or conditions but simply the right to union membership and secondary picketing.
The usual means of "progressing" the right wing agenda.... cause a crisis and then "solve" it to your advantage!