We argue that emotional coloring of experiences via political propaganda has long-term effects on risk taking. We show that living in an anti-capitalist system reduces individuals’ willingness to invest in the stock market even decades later, and in particular for those stocks and those investors targeted by the propaganda. Utilizing a large comprehensive data set of 300,000 clients of a German brokerage firm, we find that even today East Germans invest less in the stock market, both at the extensive and the intensive margin. They are more likely to hold stocks of communist countries, and are less likely to hold stocks of capitalist institutions and countries. Effects are stronger for individuals for whom we expect stronger emotional priming under the communist regime, for example those living in “showcase cities” renamed after communist politicians and in cities of Olympic gold medalists. In contrast, effects are weaker in regions where people had a less positive experience, including areas with high levels of religiosity, areas that experienced significant environmental pollution, and areas where people did not have (Western) TV –reception entertainment. Stock-market participation is still significantly reduced among East Germans who have moved to the West.
Election years appear to be a trigger for East Germans to further shift away from the stock market. We show that exposure to anti-capitalist propaganda is costly and results in less diversified portfolios, more expensive actively managed fund, and finally, lower risk-adjusted returns. The long-term effects of anti-capitalist propaganda appear to have significant welfare consequences.