Chapter 20: Human Psychology and Market Seasonality
Lisa A. Kramer
University of Toronto – Rotman School of Management
February 1, 2014
Investor Behavior: The Psychology of Financial Planning and Investing. H. Kent Baker and Victor Ricciardi, editors, 25-41. Hoboken, NJ: John Wiley & Sons, Inc., 2014
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Evidence suggests that human psychology plays a role in individuals’ financial decisions, with economically meaningful consequences observed even at the aggregate market level. This chapter considers many instances whereby human mood induced by exogenous factors is associated with economically large, statistically significant effects in financial markets. Some regularities covered by this chapter arise due to environmental factors. For instance, a relationship appears between length of day and stock returns, working through seasonal changes in depression and risk aversion. This chapter also considers financial market regularities that are consistent with mood changes due to events in the news, such as terrorist attacks, and forms of entertainment such as sporting events. In most cases, authors of the original studies apply extensive robustness checks to explore alternate hypotheses, namely that the phenomenon may arise for non-psychological reasons. The body of research builds a compelling case that human mood can markedly affect markets.
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