DP15947 Inflation and Individual Investors' Behavior: Evidence from the German Hyperinflation

Author(s): Fabio Braggion, Nic Schaub, Felix Von Meyerinck
Publication Date: March 2021
Date Revised: February 2022
Keyword(s): behavioral biases, Individual investors, inflation, Investor Behavior, Money illusion
JEL(s): D14, E31, G11, G41, N14
Programme Areas: Financial Economics, Economic History
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15947

We analyze how individual investors respond to inflation. We introduce a unique dataset containing information on local inflation and security portfolios of more than 2,000 clients of a German bank between 1920 and 1924, covering the German hyperinflation. We find that individual investors buy less (sell more) stocks when facing higher local inflation. This effect is more pronounced for less sophisticated investors. Moreover, we document a positive relation between local inflation and forgone returns following stock sales. Our findings are consistent with individual investors suffering from money illusion. Alternative explanations such as consumption needs are unlikely to drive our results.