Rotman Management — Spring 2017

rotmanmagazine.ca / 95

In the fall, when people are becoming somewhat more
depressed and risk averse, we found a much lower appetite
for risky categories like stock-based mutual funds, and a
much greater appetite for ‘safe’ categories, like government
bond funds. Then, six months later — as spring blooms and
risk appetite returns — these flows switch in the opposite
direction.
Our findings are statistically significant: We examined
trillions of dollars’ worth of U.S. mutual funds for this study
and identified seasonal flow differences due to mood in the
tens of billions of dollars. We also considered mutual fund
flows for Canada, and found similar results — albeit on a
smaller scale, on par with the smaller size of our economy.

What is the broader economic impact of your work?
First, it provides further evidence that our mood influenc-
es the way we make decisions. As a result, at a policy level,
when regulators are deciding if or how to intervene in fi-
nancial markets — say, during a financial crisis — it would
be sensible for them to take into account the time of year.
If it is autumn, and markets are crashing (and perhaps not
surprisingly, markets do tend to crash more frequently in
the fall), we know that people might react more drastically
than if that same event happens in the spring. It is possible
to design interventions and regulatory responses, depend-
ing on seasons. That’s the key implication of my work.
Lots of other related behavioural findings are coming
out, with broad societal impact. One study I read recently
looked at mood as it is influenced by the amount of sleep
people get, and how that pans out in election results. In a
particular time zone, for instance, researchers found that
the people who lived further east got less sleep that those
who lived further west, and that this led to systematic dif-
ferences in the way they voted on election day. As that pa-
per suggests, candidates might want to widely distribute
coffee on the morning of an election!
Another related finding is that when the weather
is bad on election day, people make more risk-averse
choices at the ballot box. So if it’s pouring rain, they are
less likely to vote for candidates that are perceived as
‘risky’. This is broadly consistent with what we’ve found
in financial markets.

Tell us about your findings in Australia and other coun-

tries.

I mentioned earlier that flows into and out of risky mutual

fund categories vary by season in places like Canada and

the U.S.; but this effect basically flips in the southern hemi-

sphere, because when it’s fall up here, it’s spring in, say,

Australia. Basically, wherever it happens to be fall, that’s

when people generally become more risk averse.

This finding was corroborating evidence for our notion

that the seasons are at work behind this effect. Additionally,

when we study stock market returns around the world, we

basically find that people avoid certain stocks in the darker

months, and this effect is stronger the more northern the

country you consider. So, if you compare the U.S. with Cana-

da, and then with Britain, and then Sweden, the seasonality

in stock returns only gets stronger. And when we looked at

countries like Australia, New Zealand and South Africa, this

seasonality was exactly out of sync by six months. Our evi-

dence is consistent across a broad range of countries.

How can the average investor incorporate these findings

in order to optimize her portfolio?

The impulse might be to take what I’ve just described and

try to translate it into some sort of ‘market-timing strategy’:

but that is the exact opposite of what I recommend. The trick

is not to try to time the markets — because in any given year,

the effects we’re talking about can be completely swamped

by larger economic factors that are fundamental in deter-

mining the dynamics of returns.

My advice would be to avoid market timing altogeth-

er, because the research shows that people who attempt to

time markets perform worse, on average, than those who

just buy and hold. It is a much better idea to stick with lon-

ger-term investing principles — to have a well thought-out

formula for a long-range investing plan, for example, and

to avoid buying or selling on impulse when things happen

suddenly in markets.

Furthermore, if things are topsy turvy in your life, that is

the wrong time to be making any kind of important financial

decision. If you don’t feel confident about managing your

emotions in the context of investing, one course of action

can be to consider hiring an intermediary. There are a couple

As daylight diminishes, people shun risky assets and

in the spring, they jump back into riskier holdings.