The Long-lasting Effects of Propaganda on Financial Risk-Taking

Authors: Christine Laudenbach (Goethe University), Ulrike Malmendier (Berkley), and Alexandra Niessen-Ruenzi (Mannheim)

Title: The Long-lasting Effects of Propaganda on Financial Risk-Taking

Abstract: We analyze the long-term effects of living under communism and its political Propaganda in East Germany (former GDR) for financial risk-taking. Utilizing comprehensive German brokerage data, we show that, decades after reunification, East Germans still invest significantly less in the stock market. Consistent with communist friends-and-foes propaganda, they are more likely to hold stocks of companies in communist countries (China, Russia, Vietnam), and are particularly unlikely to invest in American companies or the  financial industry. Effects are stronger for individuals for whom we expect stronger emotional priming, for example those living in communist „showcase cities" or cities of Olympic gold medalists. In contrast, East Germans with negative experiences invest more in the stock market today, e. g., those experiencing environmental pollution and suppression of religious beliefs and those without access to (Western) TV entertainment. Election years appear to have trigger effects inducing East Germans to reduce their stock-market investment further. We also provide evidence of negative welfare consequences, as indicated by investment in more expensive actively managed funds, less diversified portfolios, and lower risk-adjusted returns.