How do financial crises and stock-market fluctuations affect investor behavior and the dynamics of financial markets in the long run? Recent evidence suggests that individuals overweight personal experiences of macroeconomic shocks when forming beliefs and making investment decisions. We propose a theoretical foundation for such experience-based learning and derive its dynamic implications in a simple OLG model. Risk averse agents invest in a risky and a risk-free asset. They form beliefs about the payoff of the risky asset based on the two key components of experience effects: (1) they overweight data observed during their lifetimes so far, and (2) they exhibit recency bias. In equilibrium, prices depend on past dividends, but only on those observed by the generations that are alive, and they are more sensitive to more recent dividends. Younger generations react more strongly to recent experiences than older generations, and hence have higher demand for the risky asset in good times, but lower demand in bad times. As a result, a crisis increases the average age of stock market participants, while booms have the opposite effect. The stronger the disagreement across generations (e.g., after a recent shock), the higher is the trade volume. We also show that, vice versa, the demographic composition of markets significantly influences the response to aggregate shocks. We generate empirical results on stock-market participation, stock-market investment, and trade volume from the \emph{Survey of Consumer Finances}, merged with CRSP and historical data on stock-market performance, that are consistent with the model predictions.
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