Weather and its Effect on Financial Behavior
Updated: 5 days ago
Author: Özgür Öcal
Date of Publication: 16/09/2022
Do we determine not only the clothes we wear but also our investments according to the weather?
The general well-being of the individual is a whole in terms of spirit, body and mind. The thing that fundamentally affects well-being is the environment. Well-being affects the decisions.
Our Psychology, biology, behaviour and the decisions we make are in a deep relationship. The best example of the reflection of biology on our behavior and psychology is the state of the hormone melatonin. Dracula hormone secretes more in the dark and naturally at night. It provides rest and energy. As a result, it causes seasonal affective disorder and results in fatigue and reluctance when it is not secreted at the right time.
Are we under the influence of the factors that guide our emotions in our financial decisions?
Investors are often rational individuals who only focus on utility maximization. This type of investor forms the basis of traditional finance theories. However, investor decisions are not that simple. Psychological factors effect investor decisions. Because of psychological, environmental and other external factors, people take most of their decisions irrationally. One of these factors is the weather. The weather determines whether we meet up with our friends, have coffee in a cafe, or lie down at home and watch a movie. So much so that sometimes people can even associate their failures with the weather. One of these failures can be experienced as a result of the buying-selling decision taken in the stock market.
So, does the nice weather awakened in America affect the American stock market?
How much of these do we take independently of external conditions when making financial decisions? When people make a decision, they are mostly influenced by their psychology and mood. There are many studies on this subject and they show a relationship between the weather and people's financial behavior.
Saunders conducted a research for a New York stock exchange in 1993. The research showed the relationship between weather conditions and stocks. The following points were determined as hypotheses in the study. Bad weather will adversely affect human psychology and stock prices will fall. Otherwise, people will feel better, and skepticism and depression will decrease. As a result, stock prices will turn upwards. The researcher followed the movements between 1927-1989 on a daily basis. According to the results, stock returns decreased significantly on days when the cloud level was 100%. He revealed that the return of the stock market was definitely above the average on days when the cloud rate was between 0-20%.
The study conducted for Turkish stocks for the years 1987-2002 shows that people's decisions are not affected by rain, but by snowy days. A similar study conducted in 2009-2011 concluded that people's stock decisions were affected not by the sun, but by cloudy and sunny weather.
Environmental factors affect human decisions directly or indirectly. These effects change daily life, the course of business life and financial decisions. Studies in the literature have revealed that environmental factors cause people's opinions to change. Environmental factors can cause people to change their decisions in terms of financial markets. People can move away from rationality due to these effects. People can mismanage their risk behavior.
Am I going to take an umbrella with me or make an investment?
Seasons and meteorology can affect people's decisions and risk-taking behaviours positively and negatively. The desire to participate in activities increases in sunny weather. At the same time, the appetite for risk increases. People are willing to take more risks in sunny weather compared to cloudy and overcast weather. Making inferences about the behaviour of investors primarily depends on sensing their risk appetite. Many investors trying to predict future prices of stocks have things to consider.
Cao and Wei (2005) tested the relationship between the stock market and temperature. Accordingly, they stated that low temperature increases aggression and thus risk taking motivation in humans, while high temperature creates lethargy in humans and drowsiness decreases the risk-taking motive.
Garrett et al. (2005) tested the relationship between winter depression and stocks in the USA, Sweden, New Zealand, England, Japan and Australia. They emphasized that the resulting depression triggers risk aversion and negatively affects stock returns.
This time it's not meteorology, it's 'financelogy warns!'
Analyzing human behavior is the target topic of many fields such as neurofinance and behavioral economics. Some human behavior is scientifically rational. However, there are many irrational human behaviors in real life. It is important to realize the irrationality. Because, it provides a good analysis of the factors affecting the market and being foresighted.
Now, when deciding to invest in a stock or request a cryptocurrency, it can come in handy to check the morning weather, cloudiness, and even air pollution.
Cao, M., J. Wei. (2005), “Stock Market Returns: A Note on Temperature Anomaly”, Journal of Banking and Finance, 29, 1559-1573
Eyüpoğlu, S and Eyüpoğlu, K. (2018). Hava Kirliliği Borsa İstanbul’u Etkiler Mi? Hacettepe Üniversitesi İktisadi ve İdari Bilimler Fakültesi Dergisi, Volume: 36, Issue 3, 2018, pp. 71-87
Garrett, I., M. Kamstra, L. Kramer. (2005), “Winter Blues and Time Variation in the Price of Risk”, Journal of Empirical Finance, 12, 291-316.
Kurtoğlu, R. (2014). Davranış Ekonomisi ve Nöro-Finans. Trakya Üniversitesi Sosyal Bilimler Dergisi Cilt: 16 Sayı: 2 (1-25).
Lucey B.M. and Dowling, M., (2003). “The Role of Feelings in Investor Decision Making.” Journal of Economic Surveys. Vol. 19, No. 2. pp. 212-233.
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Saunders, E. M., (1993). “Stock Prices and Wall Street Weather.”, American Economic Review, Journal of Financial and Quantitative Analysis, Volume 39 , Issue 2 , pp. 343- 364