Blue skies, bold investments: Pleasant weather drives investors to buy more high-risk stocks, study finds
Jun 6, 2024, 11:43 IST
Imagine waking up to a sunlit morning, where the sky is painted with vibrant hues of blue and the air feels crisp and invigorating. For some, this might be the perfect weather to go for a refreshing walk or plan a picnic in the park; for others, it could be a nudge towards making riskier financial decisions! No, really.
New research by the University of South Australia has unearthed a fascinating connection — one which links pleasant weather to higher investment in lottery-like stocks. Its findings shed light on how sunny skies and clear weather conditions significantly influence investors to engage more in high-risk investments.
This study was conducted by Dr Bradrania, Senior Lecturer of Finance and a member of UniSA's Center for Markets, Values and Inclusion, alongside PhD student Ya Gao. Together, they meticulously analysed 36 years' worth of weather data, including hourly sky cloud cover, wind speed, rain depth and air temperature from major weather stations across US cities. They also examined price data of common stocks from this extensive period, ranging from 1983 to 2019.
Their findings indicate that on days with favourable weather, investors are more prone to be risk-taking and optimistic, leading to increased investment in lottery-like stocks. This surge in demand drives the prices of these stocks higher initially, but their prices eventually adjust, often resulting in significant losses for investors.
Such lottery-like stocks are typically inexpensive compared to other stocks and are perceived as opportunities for substantial gains, much like lottery tickets. However, the likelihood of a high return is minimal, categorising them as high-risk investments.
Given that a good mood can encourage risk-taking behaviour, the researchers sought to find if weather conditions are linked to the demand for these high-risk stocks, and they did — a finding that could have significant implications for financial markets.
“Over-optimism is associated with overconfidence in many cases and investors who are overconfident tend to trade lottery-like stocks more. The research suggests weather relates to gambling preference and influences our judgement and choices. It also provides some guidance on investment decisions depending on weather conditions,” Dr. Bradrania said.
Studies in psychology have delved into the profound impact of weather on human emotions and behaviour, suggesting that it can explain around 40% of our daily mood fluctuations. Sunshine, in particular, can have a huge impact on how we feel, Dr. Reza Bradrania adds.
Previous research has even underscored the broader implications of weather patterns on financial markets, indicating a tendency for stock prices to rise on sunny days and dip during cloudier periods. Weather dynamics play a pivotal role in shaping consumer spending habits as well, notably leading to increased sales during warmer weather, particularly in sports equipment and apparel sectors.
Moreover, seasonal transitions have been found to wield considerable influence over our emotional state — a phenomenon well-documented in Seasonal Affective Disorder (SAD). This condition manifests as recurring episodes of depression, typically coinciding with the onset of a fall and persisting through the winter months. The diminished sunlight during these seasons disrupts the body's natural rhythm, contributing to feelings of melancholy and lethargy.
The research is published in the Journal of Behavioral and Experimental Finance and can be accessed here.
Advertisement
New research by the University of South Australia has unearthed a fascinating connection — one which links pleasant weather to higher investment in lottery-like stocks. Its findings shed light on how sunny skies and clear weather conditions significantly influence investors to engage more in high-risk investments.
The sunny side of investing
This study was conducted by Dr Bradrania, Senior Lecturer of Finance and a member of UniSA's Center for Markets, Values and Inclusion, alongside PhD student Ya Gao. Together, they meticulously analysed 36 years' worth of weather data, including hourly sky cloud cover, wind speed, rain depth and air temperature from major weather stations across US cities. They also examined price data of common stocks from this extensive period, ranging from 1983 to 2019.
Their findings indicate that on days with favourable weather, investors are more prone to be risk-taking and optimistic, leading to increased investment in lottery-like stocks. This surge in demand drives the prices of these stocks higher initially, but their prices eventually adjust, often resulting in significant losses for investors.
Such lottery-like stocks are typically inexpensive compared to other stocks and are perceived as opportunities for substantial gains, much like lottery tickets. However, the likelihood of a high return is minimal, categorising them as high-risk investments.
Advertisement
“Over-optimism is associated with overconfidence in many cases and investors who are overconfident tend to trade lottery-like stocks more. The research suggests weather relates to gambling preference and influences our judgement and choices. It also provides some guidance on investment decisions depending on weather conditions,” Dr. Bradrania said.
The curious link between weather and human behaviour
Studies in psychology have delved into the profound impact of weather on human emotions and behaviour, suggesting that it can explain around 40% of our daily mood fluctuations. Sunshine, in particular, can have a huge impact on how we feel, Dr. Reza Bradrania adds.
Previous research has even underscored the broader implications of weather patterns on financial markets, indicating a tendency for stock prices to rise on sunny days and dip during cloudier periods. Weather dynamics play a pivotal role in shaping consumer spending habits as well, notably leading to increased sales during warmer weather, particularly in sports equipment and apparel sectors.
Moreover, seasonal transitions have been found to wield considerable influence over our emotional state — a phenomenon well-documented in Seasonal Affective Disorder (SAD). This condition manifests as recurring episodes of depression, typically coinciding with the onset of a fall and persisting through the winter months. The diminished sunlight during these seasons disrupts the body's natural rhythm, contributing to feelings of melancholy and lethargy.
Advertisement
From affecting our emotional well-being to our financial situation, weather can have a significant impact on humans, often in ways that might not be immediately obvious to us. Therefore, being aware of these subtle effects could go a long way in helping us make well-informed decisions and navigate daily challenges effectively.The research is published in the Journal of Behavioral and Experimental Finance and can be accessed here.