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Fall market jitters a SAD thing: Less daylight in fall may lead to depressed markets

Date:
October 11, 2011
Source:
University of Toronto, Rotman School of Management
Summary:
It's no surprise to researchers that financial market dips and crashes typically happen in the fall. Researchers now show that people who experience seasonal depression shun financial risk-taking during seasons with diminished daylight but are more willing to accept risk in spring and summer. Seasonal depression may be sufficiently powerful to move financial markets.

It's no surprise to researcher Lisa Kramer that financial market dips and crashes typically happen in the fall. Her most recent study, forthcoming in Social Psychological and Personality Science, shows that people who experience seasonal depression shun financial risk-taking during seasons with diminished daylight but are more willing to accept risk in spring and summer. The work builds on previous studies by Kramer and others, suggesting seasonal depression may be sufficiently powerful to move financial markets.

"We've never, until now, been able to tie a pervasive market-wide seasonal phenomenon to individual investors' emotions," says Prof. Kramer, who teaches behavioural finance at the University of Toronto's Rotman School of Management. Titled, "This is Your Portfolio on Winter," she co-wrote the study with the University of Waterloo's Mark Weber.

The researchers based their findings on a study of faculty and staff at a large North American university. Participants were paid for each part of the study they joined, which included online surveys and behavioural assessments. They also had the option of putting some or all of their payment into an investment with 50:50 odds and where the potential gains exceeded the potential losses, to mimic financial risk. Participants who experienced seasonal depression chose more of the guaranteed payments and put less money at risk in winter, but their risk tolerance came more into line with other participants' in summer.

About 10 percent of the population suffers from severe seasonal depression, known as seasonal affective disorder (SAD). However evidence suggests even those who do not suffer from the medical condition of SAD still experience some degree of seasonal fluctuation in mood. Previous research has noted seasonal patterns in stock market returns have been consistent with people avoiding risk in the fall and winter.

"So much common wisdom about economics and finance is built on the notion that we're very rational about making financial decisions," says Prof. Kramer. "But increasingly we're discovering financial decision-making is an inherently emotional process."

The findings have implications for people like financial planners who Prof. Kramer says may need to be more sensitive to seasonal variation in their clients' risk tolerance. Stock traders may also benefit from understanding where their reactions are coming from when dealing with a bad trading day.

"It's important to take a deep breath and make sure that decisions are being made on the basis of objective criteria, rather than emotional criteria," she says.


Story Source:

The above story is based on materials provided by University of Toronto, Rotman School of Management. Note: Materials may be edited for content and length.


Journal Reference:

  1. L. A. Kramer, J. M. Weber. This is Your Portfolio on Winter: Seasonal Affective Disorder and Risk Aversion in Financial Decision Making. Social Psychological and Personality Science, 2011; DOI: 10.1177/1948550611415694

Cite This Page:

University of Toronto, Rotman School of Management. "Fall market jitters a SAD thing: Less daylight in fall may lead to depressed markets." ScienceDaily. ScienceDaily, 11 October 2011. <www.sciencedaily.com/releases/2011/10/111011132058.htm>.
University of Toronto, Rotman School of Management. (2011, October 11). Fall market jitters a SAD thing: Less daylight in fall may lead to depressed markets. ScienceDaily. Retrieved August 20, 2014 from www.sciencedaily.com/releases/2011/10/111011132058.htm
University of Toronto, Rotman School of Management. "Fall market jitters a SAD thing: Less daylight in fall may lead to depressed markets." ScienceDaily. www.sciencedaily.com/releases/2011/10/111011132058.htm (accessed August 20, 2014).

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