Two events that can negatively influence investor behavior are about to converge on March 13: the shift to daylight saving time and the beginning of the NCAA Division I men’s basketball tournament, a.k.a. “March Madness.”
What do these two events have to do with the stock market? They’re part of a large and growing body of research documenting the myriad ways in which seemingly irrelevant phenomena affect our moods and, in turn, our investing behavior.
The seminal study to document a correlation between daylight saving time (DST) and the stock market appeared two decades ago in the American Economic Review. Entitled “Losing Sleep at the Market: The Daylight-Savings Anomaly,” the study was conducted by Mark Kamstra of York University, Lisa Kramer of the University of Toronto and Maurice Levi of the University of British Columbia. They found that global stock market returns are below-average on the Monday following the weekend of the shift to DST.
Note that this result is an average across many countries and years, and the market doesn’t always produce a below-average return on the Monday following the shift to DST. But it did last year in the U.S.: The S&P 500
slipped 0.7% on that day one year ago, while the Nasdaq Composite
Dozens of researchers over the past two decades have investigated the source of this historical correlation. One recent study found that the likely cause is disrupted sleep. Entitled “Sleep Disruptions and Information Processing in Financial Markets,” the study was conducted by William Bazley and Kevin Pisciotta of Kansas University and Carina Cuculiza of Marquette University. They found that disrupted sleep causes declines in the average investor’s information processing abilities — and, in particular, it leads investors to become more pessimistic.
Another recent study, this one in the medical field, provides further evidence for why disrupted sleep would have this big of an impact. Entitled “Daylight Saving Time: Neurological and Neuropsychological Implication,” the study was conducted by Karin Johnson of the University of Massachusetts Chan Medical School and Beth Malow of Vanderbilt University’s School of Medicine. The authors found that the transition to DST impacts “memory, learning, judgment, attention, and risk-taking behaviors” and “may worsen academic performance, productivity, work and athletic safety and performance, … and risk of motor vehicle crashes and crime.”
I mention the DST anomaly not because it is something you should try to trade on. On the contrary, the investment implication is that you should sit on your hands and resist the temptation to trade. That’s because your information-processing abilities and judgment will be impaired. Just as you don’t drive after drinking, you shouldn’t make changes to your portfolio after losing sleep.
If the shift to DST can affect everything from memory and judgment to car crashes, then it’s not much of a stretch to appreciate how despondency over sports losses could too.
Those of you who are not avid sports fans may think I’m exaggerating when I say “despondency.” But I’m not. My office is just down the road from the University of North Carolina, where basketball is a religion. After UNC’s loss this past Saturday to Duke, I would not have wanted to rely on fans’ judgment about the stock market or almost anything else, for that matter.
“ Sports-related despondency impacts the stock market. ”
Researchers have found evidence that sports-related despondency impacts the stock market. The seminal study in this regard was published 15 years ago in the Journal of Finance. Entitled “Sports Sentiment and Stock Returns,” its authors were Alex Edmans of the London Business School; Diego Garcia of the University of Colorado at Boulder; and Oyvind Norli of the BI Norwegian Business School.
The researchers primarily focused on soccer’s World Cup, finding that, on average, a given country’s loss in the elimination stage is followed by its stock market the next day producing a return that is significantly below average. The professors also studied cricket, rugby and basketball matches as well, with similar results.
The research’s investment implication is not to rely on sports results to trade the stock market, but instead to remind us that our moods have profound effects on our decision-making.
We like to think of ourselves as rational and objective beings, calmly and soberly assessing the data in statistically rigorous ways. In fact, psychologists will tell you, our rational brains are tender reeds that stand virtually no chance of resisting the gale-force winds of our moods — not just when shifting to DST or nursing our egos after our sports teams lose, but at any time of year.
The investment implication is to devise specific investment plans that specify how you should react come what may, and then to follow through. You should devise those plans before investing, since you stop being objective the moment you part with the money.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at firstname.lastname@example.org
Also read: When your favorite team loses, the stock market looks like a no-win game
More: Why the stock market gets a red card during soccer’s World Cup