Football And Stock Market?

Human irrationality plays a big role when it comes to financial bubbles. In academic literature, investors’ feedback and judgement mechanisms, based on the information available about the market, have been suggested as main explanations for the illogical behaviour (Schiller, 2002). However, there is also evidence that investors, including professional traders, make irrational investment decisions depending on events that have no or very little influence on the performance of the market. For instance, Edmans et al. (2007) showed that market performance decreases after national football teams lose their matches and Hirshleifer and Shumway (2003) demonstrated that stock returns tend to be higher on sunny days than on cloudy days. This has to do with the emotional state of investors.

Many physiological studies have been made to analyse how mood affects individuals’ behaviour. Humans in a good mood make different decisions than people in a bad mood, people in a good mood tend to evaluate different situations in a more optimistic way (Wright and Bower, 1992), while people in a bad mood filter information in a way that negative interpretation is more appealing to them (Isen et al., 1978).

In general, many sources proved that a lot of sunshine is correlated with positive emotions (Rind, 1996) and lack of sunshine with depression (Eagles, 1994) implying that humans feel happier on sunny days and more depressed on cloudy days. They shift their behaviour and interpret information more optimistically or pessimistically. Interestingly, people often attribute their emotions to wrong events. For example, people may feel happy while working on a new project not because of the inspiring content of the project itself but because of the sunny weather outside. The same logic can be applied to markets. Investors may evaluate stocks better on sunny days than on cloudy days increasing stock returns without any rational reason. Indeed, Hirshleifer and Shumway (2003) found that sunshine is strongly correlated with stock returns after analysing stock market indexes returns across 26 countries.

To analyse whether there is a correlation between financial bubbles and emotions Andreale et al. (2011) made an experiment. Andreale et al. showed traders videos that triggered different emotions in them and evaluated their trading behaviour in an experimental market. The researchers found that emotional state of participants affected magnitude of bubbles in markets thus providing evidence that events such as winning or losing of national football team or simply the weather may have an effect on financial bubbles.

Taken together, when analysing markets and trying to make realistic forecasts about the future performance of stocks not only news about the markets and financial data should be considered but also weather forecasts, the condition of football teams and many other factors that may appear irrelevant at first glance.