DFG PP "Experience and Expectations": Economic and Social History with Agricultural History

Expectations and experience: What governed investment in banking stocks (1897 - 1931)
Funded by DFG as part of the Priority programme (SPP 1859)
„Experience and Expectation:
Historical Foundations of Economic Behaviour”
Principal Investigator Prof. Sibylle Lehmann-Hasemeyer, PhD
Further members of the research group Andreas Neumayer, Alexander Opitz
Funding period 2016-2019

Summary:

This project aims at contributing to the overall agenda of the priority program by studying expectations and investment decisions on the Berlin stock exchange in the period 1897 to 1931. Investment decisions on stock markets are particularly interesting since here we observe types of investment behaviour, which finance models failed to predict so far. We spot for instance investors, who take high idiosyncratic risk, under-diversify their portfolios or gamble with stocks, being possibly driven by overconfidence and herding behaviour. Moreover, the socioeconomic characteristics of individual investors highly influence their expectations and investment decisions and these are very likely to have changed crucially in the considered time period. Thus we aim at improving our knowledge about typical investors in stocks and how their characteristics changed.

In general, we assume that the economic paradigm of revealed preferences holds, i.e. that beliefs and preferences can be inferred from observed actions. We therefore use stock market prices as a measure of expectations of investors, since in an efficient capital market, prices reflect the aggregated expectations of market participants with regard to future developments. We focus on investment decisions in bank stocks, since banks were large, they were especially prone to impacts of financial crises, and they possessed special skills in making the market of their own stocks and they were central for the economic development of Germany in this period.

In particular we ask whether the shares of the large banks were an attractive investment for risk averse investors and whether this changed over time. For instance were large universal banks secure investments in the 19^th, but risky in the early 20^th Century, due to their excessive risk-taking? Was the fact that banks pursued more risky policies matching the less risk averse expectations of a different group of investors which gained access to the stock markets in the 20^th Century? How long was the time horizon on which investors built expectations? How important were decisions of other investors, i.e. do we observe herding and can this be causally linked to situation of considerable uncertainty? We further test the impact of other features of banks on expectations of investors such as mergers between banks as well as direct connections to the parliament via politicians in supervisory boards of banks or to the Reichsbank via a membership in the general council and how these factors and their impact on expectations changed over time. While investment decisions are influenced by changes in the economic and political setting, they conversely affect the economy and can therefore also influence future political situations. Increasing our knowledge of investors and how they built expectations therefore crucially improves our understanding about the economic and political situation in Germany in the considered time period.
See also interview with Prof. Lehmann-Hasemeyer here.

Expectations and experience: What governed investment in banking stocks (1897 - 1931)
Funded by DFG as part of the Priority programme (SPP 1859) „Experience and Expectation: Historical Foundations of Economic Behaviour”
Principal Investigator	Prof. Sibylle Lehmann-Hasemeyer, PhD
Further members of the research group	Andreas Neumayer, Alexander Opitz
Funding period	2016-2019
Summary:
This project aims at contributing to the overall agenda of the priority program by studying expectations and investment decisions on the Berlin stock exchange in the period 1897 to 1931. Investment decisions on stock markets are particularly interesting since here we observe types of investment behaviour, which finance models failed to predict so far. We spot for instance investors, who take high idiosyncratic risk, under-diversify their portfolios or gamble with stocks, being possibly driven by overconfidence and herding behaviour. Moreover, the socioeconomic characteristics of individual investors highly influence their expectations and investment decisions and these are very likely to have changed crucially in the considered time period. Thus we aim at improving our knowledge about typical investors in stocks and how their characteristics changed. In general, we assume that the economic paradigm of revealed preferences holds, i.e. that beliefs and preferences can be inferred from observed actions. We therefore use stock market prices as a measure of expectations of investors, since in an efficient capital market, prices reflect the aggregated expectations of market participants with regard to future developments. We focus on investment decisions in bank stocks, since banks were large, they were especially prone to impacts of financial crises, and they possessed special skills in making the market of their own stocks and they were central for the economic development of Germany in this period. In particular we ask whether the shares of the large banks were an attractive investment for risk averse investors and whether this changed over time. For instance were large universal banks secure investments in the 19^th, but risky in the early 20^th Century, due to their excessive risk-taking? Was the fact that banks pursued more risky policies matching the less risk averse expectations of a different group of investors which gained access to the stock markets in the 20^th Century? How long was the time horizon on which investors built expectations? How important were decisions of other investors, i.e. do we observe herding and can this be causally linked to situation of considerable uncertainty? We further test the impact of other features of banks on expectations of investors such as mergers between banks as well as direct connections to the parliament via politicians in supervisory boards of banks or to the Reichsbank via a membership in the general council and how these factors and their impact on expectations changed over time. While investment decisions are influenced by changes in the economic and political setting, they conversely affect the economy and can therefore also influence future political situations. Increasing our knowledge of investors and how they built expectations therefore crucially improves our understanding about the economic and political situation in Germany in the considered time period. See also interview with Prof. Lehmann-Hasemeyer here.