Expectations and experience: What governed investment in banking stocks (1897 to 1931)?

Prof. Dr. Sibylle Lehmann-Hasemeyer, Hohenheim (Principal Investigator)

Dr. oec. Andreas Neumayer, Hohenheim

Dr. oec. Alexander Opitz, Hohenheim


To the project's website at the University of Hohenheim


This project studies investment decisions on the stock market. Such investment decisions are particularly interesting because previous research has identified a large gap between what finance models predict for individual investor behaviour and what can be observed in their actual behaviour (Merkle and Weber 2014, 372). As Markowitz (1952) already pointed out in the 1950s, portfolio theory assumes that investors form expectations about return and risk of securities and select portfolios according to their expectations and risk preferences. In consequence, rational economic actors should for instance diversify portfolios and trade very little. But instead, at least for modern periods, private investors have been shown to hold under-diversified portfolios (Goetzmann and Kumar, 2008), to trade frequently (Odean 1998; Barber and Odean 2000), to take high idiosyncratic risk (Calvet et al., 2007), and to gamble (Kumar 2009). There is also evidence that they use complex investment strategies different from pure mean–variance optimization (Lewellen et al. 1977; Grinblatt and Keloharju 2000). These deviations from what theory predicts have often been explained by individual psychological biases such as for instance excessive trading driven by overconfidence (Odean 1998; Glaser and Weber 2007). Moreover, the socioeconomic characteristics of an individual investor strongly influence his or her expectations and investment decisions. Goetzmann and Kumar (2008) have shown for instance that the level of under-diversification of portfolios is greater among younger, low-income, less-educated, and less-sophisticated investors. Generally a decision to buy and/or hold stocks is complex and takes place under considerable uncertainty. To reduce this uncertainty economic actors try to build expectations about future returns and risk. They do this by acquiring information on the future development of certain firms, the overall economy and the political situation and by observing and interpreting investment decision of other investors. Their expectations therefore depend on the available set of information as well as on their knowledge to interpret the information. This is built on experience and their socioeconomic profile including the level of education, age, gender and self-confidence to trust their own knowledge or how much they are prone to follow other investors’ decisions. In this project we seek to gain insights about which of those factors mattered most for investors’ expectations and investment decisions in banks stocks in the period 1897 to 1931.

We focus on investment decisions in bank stocks since these 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. The observation period was characterised by large political changes with World War I and the change from monarchy to democracy. Furthermore, we observe a number of severe economic crises which particularly hit the financial sector, such as the banking crisis in 1901 and 1907, the hyperinflation in 1923, the stock market crisis in 1927 (see Voth 2003), the black Thursday 1929 and the currency and banking crisis of 1931. On the other hand there were also times of relative stability such as most of the pre-1914 period and the years between 1924 and 1927. Focussing on this period therefore allows studying how expectations about banks’ business success in the future were made over time and how they changed due to differences in the political and economic environment as well as to experiences with previous shocks. The project thus contributes to our knowledge of how historical experience shapes expectations and decisions.



Lehmann-Hasemeyer, Sibylle/Streb, Jochen: Does Social Security Crowd Out Private Savings? The Case of Bismarck’s System of Social Insurance, in: European Review of Economic History (available online, will be published in the 2018 issue)

Lehmann-Hasemeyer, Sibylle/Streb, Jochen (2018): Discrimination against Foreigners. The Wuerttemberg Patent Law in Administrative Practice. Working Papers of the Priority Programme 1859 "Experience and Expectation. Historical Foundations of Economic Behaviour" No 7 (September), Berlin

Neumayer, Andreas: There’s No Place Like Home. Investors’ Home Bias in Germany, 1898-1934, in: Jahrbuch für Wirtschaftsgeschichte/Economic History Yearbook 59 (2/2018), pp. 447–469

Opitz, A. (2018). Reichstag Connections in Pre-and Interwar Germany, in: Jahrbuch für Wirtschaftsgeschichte/Economic History Yearbook, 59(1), 157-185.

Opitz, A. (2018). “Comrades, Let's March!”. The Revolution of 1905 and its impact on financial markets, in: European Review of Economic History, 22(1), 28-52.

Neumayer, Andreas (2019): Investors and Investment Behavior in Germany, 1869-1955, Hohenheim University: Dissertation.