Crises and the Psychology of Investment Approach

What drives people's approach to personal investing? Economic crises often leave psychological and behavioural legacies that shape financial behaviour for decades. Research has shown that individuals who experienced poor macroeconomic conditions early in life became more risk-averse in adulthood. Similarly, generations exposed to the 2008 financial crisis exhibited conservative investment behaviour and lower trust in financial institutions.

However, recent findings challenge this pattern. Their research demonstrates that individuals with direct personal experience of COVID-19 were more likely to increase investment activity, particularly in high-volatility assets, suggesting that psychological responses to health crises may induce greater, not lesser, financial risk-taking. This divergence emphasises the need to examine the psychological dynamics of how different crises, and the personal experiences within them, uniquely influence financial behaviour. One factor that hasn’t been studied closely is the fact that during COVID-19, many people had significantly more disposable income and/or savings, because they couldn’t spend money (going out, shopping, eating out, etc) and weren’t spending money on travel. Perhaps all that excess cash in the bank had an effect on their investment approach?  Perhaps they were just bored?

While financial crises consistently influence risk-taking behaviour, the nature of that influence depends heavily on the type of crisis, the timing of individual exposure, and the sociopolitical context. Traditional economic downturns like the Great Depression and the 2008 Global Financial Crisis largely produced uniform increases in risk aversion, while the COVID-19 pandemic produced a fragmented landscape of investor responses, shaped by health threats, personal loss, media narratives, and political ideology. Given that there is a great body of research around this affect on adults, it would valuable to extend this investigation into young adults, who are increasingly more active in investing given its ease online.