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

Abstract

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