Split Personalities? Behavioral Effects of Temperature on Financial Decision-making

45 Pages Posted: 22 Apr 2021 Last revised: 6 Jul 2021

See all articles by Despina Gavresi

Despina Gavresi

University of Ioannina

Anastasia Litina

University of Ioannina

Christos Makridis

Stanford University; Arizona State University (ASU); Department of Veterans Affairs (VA)

Date Written: April 11, 2021


Do environmental factors affect financial decision-making? And if so, do they have a homogeneous effect on different people? Using plausibly exogenous variation in exposure to fluctuations in temperature over a sample of individuals between 2004 and 2018 across 28 European countries and Israel, we estimate the causal effect of a marginal change in temperature on financial investments and its interaction with individual personality characteristics. We find that a 10% increase in temperature is associated with a 0.1 percentage point (pp) rise in the probability that an optimist invests in bonds and a 0.12 pp decline in the probability for stocks. However, among pessimists, we find null effects. We find similar results when we focus on the intensive margin of investment as well. Our results are identified of within-person variation after controlling for all shocks that are common within a country and year, thereby purging variation in time-varying country policies and macroeconomic conditions. These results are unique to optimists versus pessimists, rather than general happiness or interest. Furthermore, the variation in optimism is largely driven by attitudes about risk, rather than attitudes about trust. We uncover the intuition behind our findings using a simple theoretical model that incorporates optimism and the impact of temperature anomalies on cognitively demanding activities. Overall, our results are consistent with behavioral finance models where expectations moderate the transmission of shocks onto financial decision-making.

Keywords: Behavioral Finance; Expectations, Financial Decision-making, Optimism, Stocks, Temperature

JEL Classification: D87, D91, G11, G41, G51

Suggested Citation

Gavresi, Despina and Litina, Anastasia and Makridis, Christos, Split Personalities? Behavioral Effects of Temperature on Financial Decision-making (April 11, 2021). Available at SSRN: https://ssrn.com/abstract=3824341 or http://dx.doi.org/10.2139/ssrn.3824341

Despina Gavresi

University of Ioannina ( email )

Campus Psathaki
Ioannina, Epirus 48100

Anastasia Litina

University of Ioannina ( email )

45110 Ioannina

Christos Makridis (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

Arizona State University (ASU) ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

Department of Veterans Affairs (VA) ( email )

810 Vermont Avenue NW
Washington, DC 20420
United States

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