If people have been exposed to a communist and anti-capitalist ideology for many years, it can influence their attitude towards capital markets and personal investment decisions for decades, concludes a joint study by researchers from the Leibniz Institute for Financial Research SAFE, the US University of Berkeley, and the University of Mannheim. The researchers use the example of West versus East Germans, particularly former residents of the German Democratic Republic (GDR), and the results show that the more positive the memories of life in the GDR, the more pronounced the rejection of capital markets and share ownership.
Although the same legal and regulatory framework has been applied to them for around 30 years, East Germans are still more reluctant to invest in the stock market than West Germans and are between 25.2 and 27.7 percent less likely to hold shares. “Many demographic characteristics influence participation in the stock market, but ten percent can be attributed solely to the different living conditions in East and West and thus the influence of communism versus capitalism,” says Christine Laudenbach, Director of the department Household Finance at SAFE.
Positive memories of the GDR go hand in hand with fewer investments
There are also differences within the group of citizens in East Germany. “East Germans with positive memories of the GDR have below-average stock market participation. East Germans who have more negative memories of life in the GDR, on the other hand, invest more today than the East German average,” says co-author Ulrike Malmendier, Professor at the University of Berkeley and member of the SAFE Research Advisory Council.
According to the study, this negative attitude is costly for East Germans, as lower share ownership leads to less wealth accumulation on average. In addition, the share portfolios of the East German study participants are less diversified and have lower returns than those of West Germans. East Germans also invest more in high-priced banking products.” There was no stock exchange in the communist East, and people experienced very negative views of capitalism and the state’s stock market. This also contributes to the persistent differences in wealth between East and West Germans,” says study author Alexandra Niessen-Ruenzi, Professor at the University of Mannheim.
The analysis uses three data sets: a representative survey on attitudes towards capitalism, communism, and stock market participation among 9,695 East and West Germans or former citizens of the GDR, bank data on individual stock market investments of 326,437 customers, and a broker data set on individual stock market investments of 230,229 customers from East and West Germany.
