How do you decide what to do with your money? It depends on a lot of things: it’s not just about your appetite for risk or your financial goals, even the season or recent daylight saving time changes could influence our financial decisions, says Professor Lisa Kramer.
Kramer, who is a professor with the University of Toronto Mississauga (with a cross-appointment to the Finance area at the Rotman School) and a research fellow with Behavioural Economics in Action at Rotman (BEAR), often asks questions at the intersection of human psychology, finance and economics. Her previous work, which has been covered extensively by major media outlets like The Wall Street Journal, Newsweek and The Globe and Mail, has explored the effects of seasonal affective disorder (SAD) and daylight saving time changes on the stock market.
Kramer also pursues other lines of academic research, including challenging the use of animals in drug development. And she’s recently authored several opinion pieces on clean meat, cryptocurrency and various other topics.
A good portion of her research falls under the umbrella of behavioural finance, a field that looks at the human factors that shape financial decision making. Often times, individual investor behaviours have big impacts on markets.
“Whether you’re an average homeowner managing a household budget, a CEO deciding on which projects to finance, or a stock trader buying or selling securities on the market, your choices are in part driven by psychology,” explains Kramer. “The various things that influence your mood and outlook that day come into play when framing a financial decision.”
“People don’t always behave optimally, and this has a real impact on markets.”
—Lisa Kramer, Professor, Finance
A significant subset of Kramer’s work has been focused on the effects of seasonal affective disorder (SAD) on our financial actions. One of her most widely cited papers on the topic involved following more than 300 study participants over a 12 month period. At the start of the study (July), and at six month (December) and 12 month (July) points afterwards, participants completed surveys assessing their sensitivity to SAD and their general appetite for risk.
At the end of each check-in point, study participants were given $20 and had to decide whether to put some or all of the payment towards a risky investment (with 50-50 odds that they would increase or lose their investment). The study authors found that SAD sufferers were much more risk averse with their money in the winter.
More importantly, in related work, Kramer found that these individual investor behaviours appear to be impacting markets: there are observable seasonal patterns in government bond and stock returns.
Professor Lisa Kramer on TVO’s the Agenda
She’s also found that other events that tend to throw off individuals — like daylight saving time changes — can also impact markets. On the Monday following the time change, markets fall back and returns are usually negative, explains Kramer.
“We have to get away from a mainstream view of finance that assumes investors behave consistently,” says Kramer. “Lots of things affect our mood — and mood, in turn, influences the financial decisions we make.”
“People don’t always behave optimally, and this has a real impact on markets.”
Given that we are so susceptible to external factors, what is the average investor left to do?
Relax — and don’t analyze your finances on a day-to-day basis, Kramer advises.
“We get into trouble when we look at our financial holdings too often and make adjustments based on a feeling, our mood that day or season, or a knee-jerk reaction to something we have seen on the news,” says Kramer. “Instead, design a portfolio that makes sense in good times and bad. Then, trust yourself and take a step away.”
Written by Rebecca Cheung | More Rotman Insights »