David A. Price interviews Ulrike Malmendier, “Law and economics, the long-term effects of inflation, and the memory of past crises.” (eco focus: Federal Reserve Bank of Richmond, Q1/Q2 2024, pp. 22-26). One of his themes in the interview is Malmendier's recent work, which emphasizes that surviving a remarkable event can leave a lasting mark.
I mentioned how my early life path was influenced by my father's experience in World War II, and how anything can be destroyed. Your home is destroyed, you lose all your possessions and savings, and your country's currency probably has no value anymore. One way to examine this effect is simply to look at it from an information perspective. After such an experience, new data will be obtained about what can happen. That is the traditional economic view. But I would argue that there is an element beyond knowledge. When it comes to our own lives, we tend to focus on what happened to us. You are forced to overestimate the consequences of what happens to you. I first approached this issue in the context of the stock market in a paper that Stefan Nagel and I wrote about depressed babies in the United States. We showed that people who experienced stock market crashes tended to avoid investing in the stock market for years or even decades.
How has this experience of overestimating the past affected us since the pandemic? One possibility lies in how young people who have never experienced inflation before think about inflation. .
First, let's look at the inflation rate. The inflation rate began to rise gradually from 2021, and in 2022 it approached double digits. There was a very clear contrast between the long period of the Great Moderation and the sudden onset of the price shock. For older people who experienced high inflation in the '80s and even the '70s, I expect they will. This is just averaging out the long period of low inflation since the early 1980s and the experience of high inflation in the 1970s and his early 1980s. Considering their long experience, the new spikes will not be very heavy. It will only go up a little.
But it's a different story for young Americans, who have basically never seen inflation outside of textbooks. They had been experiencing very low inflation for a long time, and now all of a sudden they have inflation. At first, the response may be a little slow. But if the inflation spike goes on long enough, and it's not just a two-month jump, they say, oh, this is not the world I thought I lived in. I notice something different. High inflation only occurs in textbooks. . So the weight they place on that experience increases, and may actually be much higher than older generations. Because after a couple of years, new experiences become a much bigger part of their lives.
Another possibility relates to the question of why workers who were planning to come into the office five days a week might now be reluctant to do so.
One area where I expect to see a big experience effect in recent years is as we move through the COVID-19 crisis, which has forced many of us to work from home. I am hopeful that there will be a lasting change in the way we view the value of social interaction, the value of working from home versus working in the workplace. The leaders at my current Haas School of Business are facing this exact problem. They are wondering why people who were willing to come five days a week before coronavirus now absolutely refuse to do so. It's clearly an experience that changed people. In the classic economic model, you just talk about the information you get from that experience and maybe the setup costs of learning Zoom. But that doesn't explain everything. Even before COVID-19, we knew the length of our commutes.
Still, personal experience of what remote work and reduced commuting mean for your personal life can make a big difference. You have to experience it first. It's not because we don't have enough information, or because we can't add or subtract time spent in the car and time spent outside. It's just that decisions are made differently if you've physically experienced it than if you haven't.
In my current job, Malmendier focuses on how the experience of being a CEO leaves a mark on a person through periods of company success or failure.And I realized that being a CEO during a period of corporate turmoil can literally take years out of your life. In a previous essay I contributed to the Journal of Economic Perspectives (of which I am the editor-in-chief) in 2015, Mr. Malmendier (with Jeffrey Tate) “Behavioral CEO: The role of managerial overconfidence.” At the time, she did not emphasize the theme of how past experiences influence current decisions, but she did note that people with past performance who eventually become CEOs are more likely to influence their own decisions for the future. It seems obvious to wonder if people hold exaggerated opinions about their powers and skills.