Asset pricing when "this time is different"

Recent evidence suggests that younger people update beliefs more in response to aggregate shocks than older people. We embed this generational learning bias in an equilibrium model where agents have recursive preferences and are uncertain about exogenous aggregate dynamics. The departure from rational expectations is statistically modest, but generates high average risk premiums varying at `generational' frequencies, a positive relation between past returns and agents' future return forecasts, and substantial and persistent over- and under-valuation. Consistent with the model, the price-dividend ratio is empirically more sensitive to macroeconomic shocks when the fraction of young in the population is higher