THE WORLD Cup, which starts tomorrow, will spark a huge range of human emotions, from the excitement of victory to the despair of defeat. The effect of football results on national mood is so strong that it can spill over into the stock market and cause swings of billions of pounds. Why? While the World Cup pits arch-rivals against each other, raring to settle scores of decades past (did
The "behavioural finance" team points out that traders aren't computers, but humans. They're prone to mistakes and psychological biases. Thus, share prices are affected not only by fundamentals, but also by emotions. Internet shares were wildly expensive in the late 1990s, not because these companies' prospects were stellar, but because investors had become irrationally exuberant.
Refereeing the "efficient" versus "behavioural" match is extremely difficult. One way to settle the tie would be to compare actual prices against the theoretical "correct" value based on fundamentals. But we don't know what the "correct" value is. It could be that, based on information at the time, internet shares were fairly valued in the late 1990s, and the subsequent crash only occurred because bad news unexpectedly came out afterwards. But there is another tactic we can use - study whether prices are affected by emotions. Previous papers looked at whether weather affects the stock market. However, weather isn't correlated across a country. If it's sunny in
That's why I chose to look at sports.
Sports have huge effects on people's emotions, these are far stronger than the effects of weather, and they can't simply be neutralised by the office environment. When
Together with co-authors
The effect is stronger in the World Cup than the European Championship, which makes sense because the World Cup is the bigger stage and conjures up even more emotion. It's stronger in the elimination stages than the group stages, because if you lose you're instantly out. It's also stronger in football-crazy countries like
Depressingly, we found no effect of a win in any sport. One reason could be that sports fans are notoriously overoptimistic about their team's prospects. If fans go into each game expecting they'll win, there's little effect if they do win, but they become depressed if they lose. Another is the asymmetry of the competition: winning an elimination game merely sends you into the next round, but losing leads to instant exit.
Let's hope the Three Lions not only give us some cheer on the pitch, but also help to maintain the value of our portfolios.
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