It is often said that we cannot control the weather. But what if the weather controls how and when we invest our money? More specifically, what if the heavens controlled how much we were willing to bet on the stock market?
New research from the University of South Australia has found a connection between pleasant weather conditions and increased investment in lottery-like stocks.
Lottery-like stocks are cheap compared to other stocks and, like lottery tickets, can be seen as an opportunity to make a substantial profit. However, the chance of earning a higher return is minimal and therefore it is considered a high-risk investment. A study by UniSA finance researchers found that when the weather is sunny and skies are blue, investors are more likely to make these types of investments.
Dr Reza Bradrania, Senior Lecturer in Finance and member of UniSA’s Center for Markets, Values and Inclusion, says studies in psychology have shown that the weather has a significant effect on human mood and behaviour. It can explain around 40% of the daily variation in moods and sunlight in particular can have a big impact on how we feel.
“Since being in a good mood prompts people to take more risks, we were curious to see whether the weather, as an important factor affecting human mood, is related to the demand for lottery-like actions, which are highly risky and have lottery features like casino or lottery products,” says Dr. Bradrania.
“The idea is that investors who are in a good mood due to sunny weather tend to have more optimistic expectations or beliefs about the future profits of lottery stocks. This research was important as it has implications for how the weather can influence the judgments and choices of investors, and in particular impact their financial decisions.”
“To our knowledge, this is the first study of its kind to investigate how weather plays a role in our investment decisions and, in particular, the demand and performance of lottery-type stocks that have implications for financial markets.”
Dr Bradrania and PhD student Ya Gao collected 36 years of weather data, including hourly sky cloud cover, wind speed, rainfall depth and air temperature, from major meteorological stations in major US cities. Common stock price data during this period (1983 to 2019) was also examined.
“We found that on days with pleasant weather conditions, investors were more likely to take risks and be optimistic and invest more in lottery-like stocks, which further results in high demand and a higher price for these stocks. However, its price was later adjusted, resulting in significant losses,” says Dr. Bradrania.
“Over-optimism is associated with overconfidence in many cases and investors who are overconfident tend to trade more in lottery-like stocks. Research suggests that the weather is related to gambling preferences and It influences our judgment and choices. It also provides some guidance on investment decisions depending on weather conditions.”