Everyone knows there was a Great Depression. The information is readily available. But those who lived through the Great Depression tended to show lasting patterns of behavior–like high rates of saving and low participation in stock markets. Experiencing an event directly is different from knowing about it in other ways. It turns out that these “experience effects” are widespread: for example, related to economic events like experience of high inflation or unemployment. In the next few years, we are likely to find out that there are lasting experience effects from the COVID pandemic, too. Ulrike Malmendier lays out some of the theory and evidence in her 2020 JEEA-FBBVA Lecture to the European Economic Association, now published as “Exposure, Experience, and Expertise: Why
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Everyone knows there was a Great Depression. The information is readily available. But those who lived through the Great Depression tended to show lasting patterns of behavior–like high rates of saving and low participation in stock markets. Experiencing an event directly is different from knowing about it in other ways. It turns out that these “experience effects” are widespread: for example, related to economic events like experience of high inflation or unemployment. In the next few years, we are likely to find out that there are lasting experience effects from the COVID pandemic, too.
Ulrike Malmendier lays out some of the theory and evidence in her 2020 JEEA-FBBVA Lecture to the European Economic Association, now published as “Exposure, Experience, and Expertise: Why Personal Histories Matter in Economics” (Journal of European Economic Association, December 2021, 19(6), pp. 2857–2894; also available as NBER Working Paper 29336, October 2021). From the abstract:
Personal experiences of economic outcomes, from global financial crises to individual-level job losses, can shape individual beliefs, risk attitudes, and choices for years to come. A growing literature on experience effects shows that individuals act as if past outcomes that they experienced were overly likely to occur again, even if they are fully informed about the actual likelihood. This reaction to past experiences is long-lasting though it decays over time as individuals accumulate new experiences. Modern brain science helps understand these processes. Evidence on neural plasticity reveals that personal experiences and learning alter the strength of neural connections and fine-tune
the brain structure to those past experiences (“use-dependent brain”).
Malmendier provides a range of evidence on this theme, including a study of economic behavior of those who experienced the Great Depression. Here, I’ll just give a sample of that evidence from various studies in the narrow category of those who have had experiences of high inflation. Estimates of overall inflation in the US economy are easily available and well-publicized. But people’s own estimates of inflation are biased up or down from the official number by the changes in the prices of goods and services that they personally have purchased in the last year or so.
For example, older Americans who experienced and lived through the high US inflation rates of the 1970s are more likely to expect higher inflation than somewhat younger adults who did not–although the two groups have had identical macroeconomic experiences for the last several decades. In turn, these expectations about inflation affect current behavior, like the choice between a fixed-rate or adjustable-rate mortgage, or whether it is important to own a home at all as a hedge against inflation. Similar results arise if one looks at immigrants to the United States who had different personal experiences of inflation in their countries of origin.
There is a common pattern that women tend to expect higher rates of inflation than men. It turns out that this pattern can be largely explained by women having more direct exposure to changing prices in grocery stores.
The influence of experience on expectations even holds true for members of the Federal Reserve Board of Governors, who make explicit forecasts of inflation and also vote on monetary policy. The research finds: “In other words, personal past experiences induce FOMC
members to make worse [inflation] forecasts than they would if they were simply following the suggestions of their staff.” In turn, these experience-biased predictions about inflation are then linked to how Fed governors vote on monetary policy.
Of course, inflation is not the only way in which an especially salient early experience can affect attitudes for the long run. An effective mentoring program, for example, seeks to create a long-run effect. Getting to know someone of different religion, race/ethnicity, nationality early in life–say, by sharing an activity or a dorm room– can have a lasting effect on attitudes.
What about the pandemic? Malmendier writes: “Did living through the pandemic alter us in the longer run, beyond the explanatory power of changed financial and other personal circumstances and beyond the arrival of new information? The growing research on experience effects implies that the answer is yes—that there will be long-term changes in beliefs and behavior even “ceteris paribus”, even if we were actually back to a world pre–COVID-19.”
She offers a vivid example of John Barry, who is author of the 2004 book The Great Influenza: The Story of the Deadliest Pandemic in History, which focuses on the 1918 Spanish flu pandemic and became a best-seller in 2020. If anyone would have been ready for a new pandemic, surely it would be someone like Barry? Malmendier writes:
In the context of the COVID-19 pandemic, the infectious disease researcher John Barry from Tulane University, whose book about the 1918 Spanish Influenza pandemic had reemerged as a best seller in 2020, described this notion when asked about his experience of living through the COVID-19 pandemic and whether he had expected to witness a pandemic like this when he wrote the book. His answer was: “Yes and no. I think anybody who understands anything about infectious disease recognized that we were going to, sooner or later, face something like this; …. But, intellectually understanding it, is one thing, and having it hit you is something quite different. So, I am like everyone else in that sense” … In other words, even Barry was shaken and “hit” by this pandemic experience, and no scientific knowledge (“information”) could prepare him. He felt “like everyone else” despite knowing the science of respiratory disease epidemics, knowing the likelihood of their emergence, and knowing the effects on humanity. Intellectually understanding—having the information—is one thing. “Having it hit you is something quite different”, even for highly trained, well informed professionals.
It will be a few years before we have the data to answer questions about long-lived effects of the pandemic. But there are a range of possibilities for how it may affect the behavior of those who lived through it: desire to work remotely vs. in-person; the attractiveness of being in a downtown urban center; attending live performances; consulting health care providers in-person or online; receiving education or training in-person or online; future attitudes about vaccinations; expectations that the government will sent checks to households and/or firms when similar situations arise in the future; and so on and so on. In the future, those who lived through the pandemic in different conditions (say, different occupations or living situations) may have permanently different reactions to some of these issues. In a decade or two, those of us who have lived through the pandemic are likely to have permanently different attitudes about at least some of these issues compared with younger folks who heard or read about the panic, but didn’t live it.