Total Eclipse of the Wallet
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Audience: How dumb are they!?
They’re so dumb… eclipses (like the one today) make their stock trading go loopy. Just read this abstract from a new study:
Psychological research documents that individuals are more likely to resort to superstitious practices when operating in environments dominated by uncertainty, high stakes, and perceived lack of control over the outcomes. Based on these findings, we suggest that the stock market represents an ideal breeding ground for superstition and then test whether superstition-induced behavior affects investment decisions. Our empirical analysis focuses on some beliefs associated with eclipses, phenomena that are typically interpreted as bad omens by the superstitious both in Asian and Western societies, and we employ a dataset containing 362 such events over the period 1928-2008. Using four broad indices of the U.S. stock market, we uncover strong evidence in support of our superstition hypothesis in four distinct ways. First, the occurrence of negative superstitious events (i.e. eclipses) is associated with below-average stock returns, which is consistent with a diminished buying pressure coming from the superstitious. Second, the size of the superstition effect is estimated to increase in times of high market uncertainty and when eclipses draw wide media coverage and public attention. Third, the negative performance of the market during the superstitious event is followed by a reversal effect of similar magnitude (10 basis points per day) on the subsequent trading days. Fourth, eclipses are accompanied by a trading volume decline. When we extend our analysis to a sample of Asian countries, we find analogous results. The patterns we document are inconsistent with the Efficient Market Theory, as eclipses are perfectly predictable events.
That’s right: price declines (made up in subsequent days) and lower trading volume. Maybe you don’t want to invest on the day of a bad omen. Maybe you think others don’t want to invest on the day of a bad omen. Maybe you’re just rocked by wall-to-wall eclipse coverage. Whatever the cause, it occurs in both the East and the West — a uniting symbol of human irrationality.
So, should you make your investment decisions on the basis of the cycles of the moon and stars? Well, as we discussed here before, it wouldn’t be any worse than watching CNBC.
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[...] too long ago, we looked at what happens to the stock market on eclipse days. People in Western and Asian societies consider eclipses unlucky, and so we see slight price [...]