Behavioral bias occurs in all sorts of odd ways, but basically can be traced back through evolutionary history to when humanity’s survival depended on deep co-operation and the invention of sewing. Our ability to cope with the huge changes in weather conditions experienced over our short history defines our species: we didn’t go extinct.
It shouldn’t therefore be particularly surprising that we’re unconsciously affected by environmental conditions: there was a time, not so long ago, when nothing else mattered. Now, cosseted by central heating and air conditioning, we’re remote from our material world but, it turns out, for investors our material world is not remote from us.
“We define seasonal affective disorder (SAD), which is a condition characterized by recurrent depressive episodes that occur annually … We describe 29 patients who suffered depressions in fall and winter; these depressions remitted by the following spring or summer”.
The research goes on to point out the similarity between the circannual rhythms of animal life and the seasonality of SAD, and speculates that SAD may be an evolutionary hangover from a time when the changes in the seasons, as marked by the varying amount of daylight, provided markers for hibernation and reproduction. As the paper points out SAD sufferers are twice as likely to have children born in late spring or summer. Interesting, although hardly conclusive.
Sadflows
Given all of the other types of bias we’ve seen and the issues posed by SAD it perhaps isn’t so surprising that it turns out to be implicated in some rather odd investor behavior. However, the strength of the results testifies to a underlying seasonal rhythm which impacts all investors, not just those for whom sunlight deprivation is a health hazard.
Lisa Kramer, Associate Professor of Finance at Toronto, has a track record of fascinating research into the effect of the environment on investors. So, for example, Kramer, Mark Kamstra and Maurice Levi have shown that US Treasuries have an astonishing seasonal variation in monthly returns. In Seasonal Variation in Treasury Returns they find an 80 basis point change (that’s a 0.8% change to you and me) between April and October which can’t be explained by (deep breath):
“Macroeconomic seasonalities, seasonal variation in risk, cross-hedging between equity and Treasury markets, conventional measures of investor sentiment, seasonalities in the Treasury market auction schedule, seasonalities in the Treasury debt supply, seasonalities in…
