Childhood Experiences & Household Decisions

The dissertation focuses on the impact of personal experiences on household financial decision-making. It introduces a novel measure: the childhood experience of a father's job loss. This measure is chosen because father's job loss is a significant and memorable event directly related to labor income risk—the primary income source for most households. The study leverages publicly available datasets, the Panel Study of Income Dynamics (PSID) and the Health and Retirement Study (HRS), allowing for observation of the experience at the individual level. The time lag between childhood experience and adult outcomes minimizes omitted variable bias. The PSID's detailed job displacement information permits the distinction between involuntary (layoffs, company closures) and voluntary (quitting) job losses. However, the PSID's oversampling of low-income families and infrequent wealth surveys limit analysis of wealth effects. The HRS, while providing long-term perspective, utilizes retrospective self-reports, raising potential recall bias as a concern, which the study plans to address through methodological strategies.

The study draws upon the behavioral economics and finance literature, which suggests that personal experiences significantly shape individual decisions. It cites research showing that investors learn from their experiences (Seru, Shumway, and Stoffman, 2010; Linnainmaa, 2011) and may overweight personal experiences in decision-making (Kaustia and Knupfer, 2008; Choi et al., 2009; Chiang et al., 2011). The research also notes that traumatic events, like the Great Depression (Malmendier and Nagel, 2011), can permanently affect behavior. The impact of personal experience is not limited to individual investors; CEOs' experiences also influence corporate decisions (Graham and Narasimhan, 2004; Malmendier, Tate, and Yan, 2011; Schoar and Zuo, 2011; Bernile, Bhagwat, and Rau, 2014). The dissertation will investigate how the timing of the father's job loss, during different stages of childhood, impacts the formation of expectations and risk attitudes, recognizing that cognitive development plays a crucial role in shaping responses to such events. The age-related effects are explored, noting the development of probabilistic thinking around age five (Fontanari et al., 2014), making experiences before that age less likely to directly influence expectations. The study acknowledges and addresses existing research on personal experiences and their impact on investment decisions.

The core data comes from two prominent longitudinal surveys: the Panel Study of Income Dynamics (PSID) and the Health and Retirement Study (HRS). The PSID, initiated in 1968, provides annual (until 1993) and biennial data on US families and their descendants, including detailed employment histories and reasons for job changes. The study uses the PSID's information on father's job loss categorized as: company folding, layoff/firing, and quitting, enabling an analysis of voluntary vs. involuntary job loss. The HRS, collecting data since 1992, allows for the examination of long-term effects, as it includes cohorts born before 1923. While the HRS data includes retrospective self-reporting of childhood experiences of unemployment, the nature of this event (if traumatic enough to impact risk attitudes, it's likely memorable) mitigates recall bias concerns. The study also discusses other datasets such as the Survey of Consumer Finances (SCF) and the National Longitudinal Survey of Youth (NLSY), highlighting their limitations for the specific research question: SCF lacks childhood experience data and intergenerational linkage, while NLSY's focus on younger individuals and limited father's job loss information make it less suitable.

The study relies on two major longitudinal datasets: the Panel Study of Income Dynamics (PSID) and the Health and Retirement Study (HRS). The PSID, initiated in 1968, offers detailed annual (until 1993) and then biennial data on US families, tracking their income, employment, and related factors across generations. Its strength lies in its comprehensive employment history, including reasons for job changes (company folding, layoffs, quitting), which is crucial for differentiating between voluntary and involuntary job losses. The data includes information on the father's employment allowing for an analysis of the childhood experience of job loss and its consequences. However, the PSID’s deliberate oversampling of poorer households restricts the variability in household wealth data, and infrequent wealth surveys impede a comprehensive analysis of wealth's impact. In contrast, the HRS, with data collected since 1992, provides information on older cohorts, including those who experienced the Great Depression, and offers detailed financial data. This allows studying the long-term effects of childhood experiences. While the HRS relies on retrospective self-reports of childhood experiences, this limitation is mitigated by the potentially strong memory of traumatic events like a father’s prolonged unemployment.

Despite the richness of the PSID and HRS datasets, the study acknowledges limitations. The PSID's oversampling of poorer households reduces the variation in household wealth-related variables, making it difficult to find statistically significant wealth effects. The infrequent surveying of wealth in the PSID further compounds this issue. The HRS uses retrospective self-reports of childhood experiences, which can be susceptible to recall bias. However, the study argues that the salience of a father's job loss, particularly if it is a prolonged period of unemployment, should lead to accurate recall, even decades later. To further address potential biases, the study carefully defines variables and analyzes the types of job loss (involuntary vs. voluntary). The PSID data, by recording job losses within a year, minimizes inaccuracies due to delayed reporting, while the specific questioning on job displacement reasons allows separating voluntary from involuntary events. The data analysis also considers the varying cognitive capabilities of children at different ages, acknowledging that the impact of father's job loss might vary across early childhood, middle childhood, and early adolescence.

The study constructs key variables from the PSID and HRS datasets to measure the childhood experience of a father's job loss. This involves linking children's records with their fathers’ employment histories over various childhood periods. The PSID categorizes job displacement into: company folding, layoff/firing, and quitting. The study defines an indicator for involuntary job loss which combines company folding and layoff/firing to capture all involuntary job displacement events. The proportion of respondents experiencing these types of job loss is reported for different age groups (early childhood, middle childhood, early adolescence). A ‘quit’ indicator serves as a placebo to assess whether job changes per se affect outcomes or whether only involuntary job losses have an impact. The HRS also directly asks respondents about a father’s unemployment experience before the age of 16. The study discusses the imperfect concordance rates between various data points on father’s absence, highlighting potential effects of fatigue during surveys and wording differences across survey waves. Overall, the study emphasizes the reliability of the data, outlining the methodology for creating the relevant variables and addressing potential data limitations.

The core analysis investigates the relationship between a father's job loss during childhood and subsequent stock market participation in adulthood. Using the PSID data, the study finds a significant negative correlation between experiencing an involuntary job loss (layoffs or company closure) during middle childhood (ages 5-10) and later stock market participation. This suggests that witnessing such a loss during a formative period impacts individuals' risk tolerance and investment decisions later in life. Interestingly, the effect is less pronounced or absent for job losses experienced in early childhood (0-5 years) or for voluntary job losses (father quitting his job). This suggests a crucial role for both the timing of the event and the nature of the job loss in shaping adult financial behavior. The analysis uses logit models, controlling for various factors such as age, gender, ethnicity, and parental education, to isolate the effect of the childhood experience. The 'quit' indicator serves as a valuable placebo test, demonstrating that simply changing jobs does not drive the observed effect. The negative effect is primarily associated with involuntary job loss events, indicating their significant impact on shaping long-term financial choices.

To assess long-term effects, the study utilizes data from the Health and Retirement Study (HRS). This dataset, encompassing older cohorts, allows for examining the lasting impact of childhood experiences. The HRS analysis confirms the negative association between childhood experience of father's unemployment and stock market participation, even after many years. However, the study notes that the effect size diminishes over time for the older HRS sample. The HRS analysis also incorporates controls for various household characteristics (gender, ethnicity, age, parental education) and further considers the potential influence of surprise inheritances. Despite the addition of these controls, the negative relationship between childhood unemployment experience and reduced stock market participation remains highly statistically significant in the HRS data. This suggests the enduring influence of childhood experiences in shaping long-term financial decision-making patterns. The consistent negative association across both datasets strengthens the study's findings and reinforces the importance of incorporating childhood adversity into models of adult financial behavior.

The findings suggest several mechanisms through which a father’s job loss during childhood may influence adult stock market participation. Experiencing such a loss can increase individuals' subjective probability of future labor income shocks, leading to greater risk aversion. The traumatic nature of the experience can also alter individuals' risk preferences more broadly. The study uses the lack of a correlation between a father voluntarily quitting his job and later stock market participation as a form of placebo test, showing that simply changing jobs does not account for the effect. The lack of significant effects for early childhood job loss (0-5 years) suggests that sufficient cognitive ability to understand the implications of the event is necessary for it to impact subsequent financial behaviors. Thus, the findings support the hypothesis that personally experienced economic adversity during childhood significantly shapes risk preferences and expectations about future labor income, resulting in more conservative investment choices in adulthood. The significant and persistent effect, especially when the job loss is involuntary, highlights the importance of incorporating this type of childhood experience into broader models of financial decision-making.

This section analyzes the relationship between a father's job loss during childhood and the likelihood of the child becoming a business owner in adulthood. The study uses the PSID dataset to examine this relationship. The primary finding is a statistically significant negative correlation between experiencing a father's involuntary job loss during middle childhood (ages 5-10) and the probability of being a business owner later in life. This effect is economically significant, representing a 2.4 percentage point decrease in business ownership likelihood. The average business ownership rate in the sample is 11%, providing context for this significant decline. The analysis employs logit models to isolate the impact of the childhood experience while controlling for factors such as age, gender, ethnicity, and parental education. Importantly, the analysis finds no significant effect associated with the father voluntarily quitting his job, indicating that the effect is linked specifically to involuntary job losses, signifying the importance of the traumatic and unpredictable nature of the event. The study further investigates whether the type of involuntary job loss (company folding vs. layoff) has different effects.

The study distinguishes between different types of involuntary job losses: those due to company folding and those due to layoffs. The analysis finds that both types of involuntary job loss are significantly associated with a lower likelihood of business ownership. However, the impact of company folding appears larger than that of layoffs. The key difference is whether the employer's failure is a factor. This suggests the loss of employment due to the employer's failure might convey a stronger message about risk and uncertainty in business ventures than a layoff. Further, the timing of the father's job loss is considered, dividing childhood into five-year intervals. A significant impact is observed for job losses experienced during middle childhood and early adolescence, while experiences in early childhood (0-5 years) demonstrate no statistically significant effect. This is attributed to the limited cognitive capabilities of very young children to process and remember such events, highlighting the importance of cognitive development in shaping responses to early life experiences and their subsequent impact on adult entrepreneurial endeavors.

The study interprets its findings through the lens of risk perception and attitudes. Witnessing a father's involuntary job loss during childhood can profoundly shape individuals' beliefs about labor market risk and potentially business risk. If individuals overweight personal experiences when forming expectations, then those exposed to job losses will hold more pessimistic views of labor markets. This heightened perception of risk can make them less inclined to pursue entrepreneurship, which is intrinsically risky. The use of a voluntary job-loss indicator (father quitting) as a placebo test further strengthens the interpretation, showing that the effect is not driven by simply changing jobs. The absence of an effect in early childhood provides further support, suggesting that the capacity to understand and internalize the event's implications is critical for it to impact future choices. In essence, the findings indicate that involuntary job loss during the formative years can leave a lasting impact on an individual's risk tolerance, leading to more cautious choices related to entrepreneurship in adulthood.

The dissertation concludes that childhood experiences significantly influence later-life entrepreneurial choices. The core finding is a robust negative correlation between experiencing a father's involuntary job loss during middle childhood (ages 5-10) and the subsequent likelihood of owning a business. This effect remains statistically significant even after controlling for various factors like age, gender, ethnicity, and parental education. The magnitude of the effect is notable, representing a 2.4 percentage point reduction in business ownership probability relative to a sample average of 11%. Crucially, no such effect is observed for voluntary job losses (father quitting), highlighting the role of involuntary job loss and associated economic hardship and uncertainty in shaping entrepreneurial aspirations. The absence of an effect for job losses experienced in early childhood (0-5 years) is interpreted as support for the hypothesis that a certain level of cognitive development is necessary to understand and internalize the consequences of such an event, influencing later risk attitudes and expectations.

The study's results are interpreted as evidence supporting a causal link between the childhood experience of involuntary job loss and decreased entrepreneurial drive. The mechanism is likely rooted in altered risk perceptions and preferences. Experiencing a father's job loss during childhood may foster a more pessimistic outlook on labor market and business risks. This leads to more risk-averse behavior, making individuals less likely to pursue the inherent uncertainties associated with business ownership. The ineffectiveness of the early childhood experience provides a strong pseudo-placebo test confirming the cognitive aspect of the relationship. The fact that the effect is absent for voluntary job loss reinforces this causal interpretation. This is because voluntary job changes do not carry the same level of emotional trauma and economic uncertainty as involuntary job losses, making them less likely to leave a long-term impact on individual risk perceptions and behaviors related to business ventures. The study successfully highlights the importance of considering childhood experiences to understand adult economic choices and behaviors.

The findings of this dissertation contribute significantly to the understanding of the long-term consequences of childhood adversity on economic decision-making. The study shows a significant and persistent link between experiencing a father's job loss during a critical period in childhood and the reduced likelihood of becoming an entrepreneur. The results underscore the importance of integrating childhood experiences into broader models of economic behavior, especially in areas like entrepreneurship and household finance. Further research could explore the interactions between childhood experiences and other factors influencing entrepreneurial choices. For instance, investigating the mediating roles of social support networks, educational attainment, or access to financial resources could provide a deeper understanding of the pathways through which childhood adversity affects entrepreneurial outcomes. Exploring gender differences in response to the father's job loss and considering the role of other forms of childhood economic hardship could also prove fruitful avenues for future research.