Researchers discover negative correlation between good weather and financial decision making
The old idiom about ‘making hay while the sun shines’ may not be true of investment decisions.
A new international study has found that buying stocks on sunny days may not turn out as bright as investors hope, leading to poor decision making.
The research included a team from the University of Portsmouth’s Centre for Innovative and Sustainable Finance in the UK who looked at weather station data to reveal when climate exerts the biggest influence on investors.
They examined the relationship between sunny days and the seasoned equity offerings (SEOs), companies’ post-IPO fundraises.
On sunny days investors made higher bids, leading to lower discounts for shares in the primary market. Even a small increase in sunshine intensity could reduce discounts by 2.4% while a small increase in sunshine duration could decrease discounts by 3.4%.
Professor Jia Liu, CISF Centre Director and Professor of Accounting and Finance at the University of Portsmouth, said that sunny days impact people’s emotional state and sentiment.
“With sunny weather, often come good spirits – which in many circumstances is a positive, but that’s not the case with financial decision-making,” he said. “When the sunshine intensifies, bidders become overly optimistic and less risk-averse, which can lead to higher bid prices for seasoned equities.”
Consequences in changing climate
With climate change taking place across the world, the researchers believe that their findings will become increasingly important in maintaining stability of capital markets.
“We want to make investors aware that during periods of sunny weather, they become more optimistic about their investments,” Lui said. “This will make them more inclined to take risks that aren’t justified by asset values. Therefore, they should factor this consideration in when bidding for shares or they might suffer losses.”