To what extent does weather influence individuals’ financial decision-making behaviour? Evidence from the spread-trading market

Abstract

This thesis, which is divided into 3 papers, investigates the relationship between weather and individuals’ trading behaviour in the spread-trading market. The spread-trading market offers the opportunity of examining individuals’ trading records, and thus enables the exploration of the impact of weather on individuals’ financial decision-making behaviours. The first paper investigates the effect of a range of weather variables on individual spread traders’ hourly trading volumes and their propensity to buy or sell (bullish/bearish trading sentiment). The findings suggest that a range of weather factors appear to influence the trading volume, but have less effect on trading sentiment. Importantly, the weather effects were different in the winter and the summer, and often in opposite directions. The neglect of this important seasonal effect could be why previous studies have produced ambiguous results concerning the effect of weather on trader behaviour.

The second paper examines the relationship between weather and the most widely reported behavioural bias in financial markets, the ‘disposition effect’ (DE); whereby, traders tend to sell positions which are in profit rather than those that are in loss. Previous research suggests that weather can influence individuals’ mood. In addition, system 1 thinking is more associated with emotional rather than logical thought, whereby investors rely more on their intuition, rather than on rational analysis. Therefore, via its impact on mood, it is postulated in paper 2 that weather could influence the degree of system 1 thinking in which investors engage and that this in turn could influence the incidence of the DE. Indeed, the results reported in paper 2 indicate that weather does significantly influence individuals’ DE. In addition, in line with the affect infusion model (AIM: Forgas, 1995), the biased decisions (i.e. DE) of less (cf. more) informed traders are more affected by weather factors. This study is the first to link weather conditions to the occurrence of the degree of the DE and, therefore, contributes to the literature exploring the origins of the DE.

The third paper tests the impact of weather changes on individuals’ risk-taking decisions. Previous literature suggests that changes in weather can influence people’s psychology and physiology. In addition, humans possess the ability to maintain thermal homeostasis via both biological mechanisms and behaviours. Therefore, sudden changes in weather may have a greater effect on mood and behaviour than the general weather conditions. It might, therefore, be expected that individuals’ trading behaviour will be influenced not only by the current weather conditions, but also changes in those conditions. In addition, I control for current weather conditions and potential seasonal differences in the effects of weather factors. The results suggest that a range of weather changes that might be associated with greater relative personal discomfort (e.g. precipitation increases and air pressure decreases in winter and temperature increases in summer months) induce risk-taking behaviours. The results confirm the importance of taking account of weather changes when communicating risk-related messages and for those designing effective means of managing risk.

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