Associate Professor Lisa Kramer examines how seasons and sunlight affect investors' decisions (photo by Norm Betts)

When winter doldrums and stock markets collide

Suffering from winter blahs? You’re not alone. The lack of sunlight that characterizes the quiet time between New Year’s and St. Patrick’s Day has important effects on investors and the economy.

Lisa Kramer, an associate professor of finance with the University of Toronto Mississauga and the Rotman School of Management, talked with U of T News about her research into just how the environment affects economic decisions. 

How would you describe your research expertise?
I study the way humans make financial decisions. Sometimes our environment and even our emotions play a role in unexpected ways, and that fascinates me.

What is "behavioural finance"?
Behavioural finance is an attempt to bring the discipline of finance closer to reality. A lot of standard financial models are based on counter-intuitive assumptions about the way people behave. The models assume we are extremely rational like Star Trek’s Mr. Spock when in reality we tend to be a bit impulsive like Homer Simpson.

Properly accounting for the way people make decisions in practice helps us to explain more accurately what we observe in financial markets.

Do winter blues lead to stock market crashes or downward cycles?
It is likely the case that fundamental economic conditions are the real drivers of crashes and business cycle troughs. Nevertheless, I do believe widespread seasonalities in human mood can exacerbate or moderate pre-existing economic conditions. Thus if macroeconomic conditions worsen in the autumn, the impact on the economy can be worse than if the same thing happens in the spring.

So, Canadian winters do affect our economy? What about other countries, such as Britain?
On this front, we really do speak the same language as our British friends. As daylight diminishes in the autumn, we are similarly prone to some despondency, and the dampened mood generally continues through winter until daylight becomes much more abundant.

The latitude at which the Brits live, however, is much higher than that of most Canadians, so they do tend to experience stronger mood effects than us, on average. And the implications for financial markets are stronger too. In the autumn, as we all become a bit more depressed, we become less willing to hold risky assets like stocks, which tends to dampen prices. That effect is a bit stronger in Britain than in Canada, seemingly due to the difference in latitude.

In the new year, as daylight returns, we resume our taste for risk and become more interested in stocks and similarly risky financial assets, again with somewhat stronger effects in Britain than in Canada, on average.

How did you first become interested in looking at how the environment can affect the economy and investment decisions?
It was a bit of an accident. In the late 1990s, my co-authors and I were talking to UBC psychologist Stanley Coren to see whether he had any suggestions for factors that synchronize large populations in ways that might have economic implications. He mentioned seasonal affective disorder and we were instantly captivated. After some digging around in medical and psychology journals, we came to understand that depressed people are less willing to take risks, including financial risks, and this paved the way for our subsequent research on the relationship between seasonality in human depression and seasonality in financial markets. We really owe this entire stream of research to Professor Coren.

What is the most surprising thing you've learned from your research?
I think I was most surprised to learn that there are legions of researchers in other disciplines who are also interested in the way human mood influences economic decisions. For example, I have struck up great collaborations with experimental social psychologists and neuroscientists who are curious about the very same questions that make me excited to come to work every day.

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