Weather isn’t something we usually consider when making financial decisions. However, a new study from the University of South Australia suggests that sunny days might just be a secret driver behind increased investment in high-risk stocks.
Researchers have discovered a fascinating link between pleasant weather and a surge in investments in so-called lottery-like stocks. These stocks, although cheap, offer a slim chance of substantial gains, akin to lottery tickets. While they present the possibility of high returns, the risks involved are significant.
The study, led by Dr Reza Bradrania, Senior Lecturer of Finance at UniSA’s Centre for Markets, Values and Inclusion, indicates that sunny weather can heavily influence investors’ mood and behaviour. Previous psychological studies have shown that weather can account for about 40% of daily mood variations, with sunshine playing a particularly potent role.
Dr Bradrania explains, “Good moods often lead to riskier behaviour. Given that weather significantly impacts human mood, we wanted to explore its relationship with the demand for lottery-like stocks, which are high-risk and have the allure of gambling products like casino games or lotto tickets.”
He adds, “The hypothesis is that investors in a sunny, upbeat mood tend to have more optimistic expectations about the future payoff of these stocks. This study is crucial as it sheds light on how weather can affect investors’ judgement and financial decisions.”
This pioneering research, the first of its kind to explore weather’s impact on investment decisions, involved gathering 36 years of weather data, including variables such as hourly sky cloud cover, wind speed, rain depth, and air temperature from major weather stations across US cities. The price data of common stocks from 1983 to 2019 was also analysed.
The findings reveal that on days with pleasant weather, investors are more likely to take risks and invest in lottery-like stocks, resulting in increased demand and higher prices for these stocks. However, these prices often adjust later, leading to significant losses for investors.
Dr Bradrania points out, “Overoptimism can lead to overconfidence. Overconfident investors tend to trade lottery-like stocks more frequently. The research suggests that weather influences our gambling preferences and financial judgements. It offers valuable insights for making investment decisions based on weather conditions.”
This intriguing study underscores the unexpected ways that our environment can shape financial behaviour, providing a unique perspective on the factors influencing market trends and investment choices.
