Feelings and Finance

Paper Session

Sunday, Jan. 8, 2017 3:15 PM – 5:15 PM

Sheraton Grand Chicago, Colorado
Hosted By: Association of Financial Economists
  • Chair: Jennifer Lerner, Harvard University

Mood, Firm Behavior, and Aggregate Economic Outcomes

Vidhi Chhaochharia
,
University of Miami
Dasol Kim
,
Case Western Reserve University
George M. Korniotis
,
University of Miami
Alok Kumar
,
University of Miami

Abstract

This study examines whether mood affects the aggregate macroeconomy through its impact on firm-level decisions. Motivated by the psychology literature, we use sky-cloud-cover as a mood proxy and show that mood affects the economic expectations of small business managers. On relatively sunnier days, managers have more optimistic expectations and the component of their expectations related to mood influences hiring and investment decisions. As a result, at the aggregate-level, mood affects U.S. state-level job creation and new business starts, especially during periods of greater economic uncertainty. Collectively, these results suggest that mood-induced economic expectations influence firm-level managerial decisions and state-level economic fluctuations.

Day of the Week and the Cross-Section of Returns

Justin Birru
,
Ohio State University

Abstract

This paper documents a new empirical fact. Long-short anomaly returns are strongly related to the day of the week. Anomalies for which the speculative leg is the short (long) leg experience the highest (lowest) strategy returns on Monday. The exact opposite pattern is observed on Fridays. The effects are large; Monday (Friday) alone accounts for over 100% of monthly returns for all anomalies examined for which the short (long) leg is the speculative leg. Consistent with a mispricing explanation, the pattern is fully driven by the speculative leg of the strategy. The observed patterns are consistent with the abundance of evidence in the psychology literature documenting that mood increases from Thursday to Friday and decreases on Monday.

Mood Beta and Seasonalities in Stock Returns

David Hirshleifer
,
University of California-Irvine
Danling Jiang
,
State University of New York-Stony Brook
Yuting Meng
,
University of South Florida

Abstract

Existing research has documented cross-sectional seasonality of stock returns – the periodic outperformance of certain stocks relative to others during the same calendar month, weekday, or pre-holiday periods. A model based on the differential sensitivity of stocks to investor mood explains these effects and implies a new set of seasonal patterns. We find that relative performance across stocks during positive mood periods (e.g., January, Friday, the best-return month realized in the year, the best-return day realized in a week, pre-holiday) tends to persist in future periods with congruent mood (e.g., January, Friday, pre-holiday), and to reverse in periods with non-congruent mood (e.g., October, Monday, post-holiday). Stocks with higher mood betas estimated during seasonal windows of strong moods (e.g., January/October, Monday/Friday, or pre-holidays) earn higher expected returns during future positive mood seasons but lower expected returns during future negative mood seasons.

Portrait of the Angry Decision Maker: Experiments under Risk and Uncertainty

Rebecca A. Ferrer
,
National Institutes of Health
Alexander Maclay
,
Harvard University
Paul M. Litvak
,
Air BnB
Jennifer Lerner
,
Harvard University

Abstract

That anger elicited in one situation can carry over to drive risky behavior in another situation has been described since the days of Aristotle. The present studies examine the mechanisms through which and the conditions under which such behavior occurs. Across three experiments, as well as a meta-analytic synthesis of the data, results reveal that incidental anger is significantly more likely to drive risky decision making among males than among females. Moreover, the experiments document that, under certain circumstances, such risk-taking pays off financially. Indeed, the present experiments demonstrate that, because the expected-value-maximizing strategy in these studies rewarded risk-taking, angry-male individuals earned more money than did both neutral-emotion males and angry females. In sum, these studies found evidence for robust disparities between males and females for anger-driven risk-taking. Importantly, although men did not experience more anger than women, they did show a heightened tendency to respond to anger with risk-taking.
Discussant(s)
Alex Edmans
,
London Business School
Samuel Hartzmark
,
University of Chicago
Juhani Linnainmaa
,
University of Chicago
Devin Pope
,
University of Chicago
JEL Classifications
  • G1 - Asset Markets and Pricing
  • Y9 - Other