  How do macro-financial shocks affect investor behavior and market dynamics?
Recent evidence on experience effects suggests a long-lasting influence of
personally experienced outcomes on investor beliefs and investment, but also
significant differences across older and younger generations. We formalize
experience-based learning in an OLG model, where different cross-cohort
experiences generate persistent heterogeneity in beliefs, portfolio choices,
and trade. The model allows us to characterize a novel link between investor
demographics and the dependence of prices on past dividends, while also
generating known features of asset prices, such as excess volatility and return
predictability. The model produces new implications for the cross-section of
asset holdings, trade volume, and investors' heterogenous responses to recent
financial crises, which we show to be in line with the data.
