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The Hidden Cost of Superstition

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Does superstition play a role in how people make their financial and investment decisions?

While the impact of superstitious beliefs has been widely researched and documented in fields like psychology and sociology, its role in behavioral finance and economics is still a relatively marginal area of study. Still, it is nevertheless generating increased interest in the financial community as a result of the work being done by academics like Gabriele Lepori, an assistant professor in the finance department of the Copenhagen Business School in Denmark, who specializes in behavioral finance.

Lepori’s research on superstition goes with the premise that every culture in the world is rife with superstition, and even in today’s world, superstitious beliefs have a clear impact on human behavior. Psychological research has shown that individuals are more likely to let superstition guide their actions when they’re in environments dominated by uncertainty, high stakes and a perceived lack of control over the outcomes of those actions, he says, and as such, the stock market, by its very nature, is the perfect target for superstition and the perfect venue to test whether superstition-induced behavior affects investment decisions.

To test his hypothesis that superstition influences stock market performance (the findings of which are detailed in a paper entitled “Dark Omens in the Sky: Superstitious Beliefs and Investment Decisions,”), Lepori honed in on a single event that many people around the planet are superstitious about: An eclipse.

Despite the advances in science that have been able to explain to the general public exactly what solar and lunar eclipses are, people the world over still fear these natural phenomena. Eclipses are bad omens in many cultures, portentous of bad luck and illness; at the time of an eclipse, even the most rational of people can often behave completely irrationally by letting their superstitious beliefs get the better of their reason.

Because eclipses are so hyped up by the media and highly visible, and because they affect the whole world at once, their effects on the stock market are easy to measure, Lepori says.

“You cannot conduct an empirical study unless you can find a superstitious belief like an eclipse that affects a large group of people at the same time and in the same direction,” he says.

Lepori therefore focused his efforts on examining the impact that the 362 solar and lunar eclipses that took place between 1928 and 2008 had on the stock market. He examined the performance of four major stock market indices – the S&P 500; the Dow Jones Industrial Average; the New York Stock Exchange Composite; and the Dow Jones Composite Average – before, during and after each eclipse.

Based on the performance of the indices at the time of each eclipse, Lepori was able to conclude that these events lead to below-average stock returns.

“The stock market returns seemed to be lower than average around the three days of each eclipse, which means there was reduced buying in the market as the superstitious decided to postpone or delay their participation in the market,” Lepori says.

His findings also showed that the size of the superstition effect increases in times of high market uncertainty and when eclipses draw wide media coverage and public attention. “This is consistent with the idea that people resort to superstition when they feel the uncertainty of something they cannot control in their environment,” Lepori says.

But while he was able to conclude that eclipses are always accompanied by a trading volume decline, Lepori’s research also showed that the negative performance of the market during the superstitious event was followed by a reversal effect of similar magnitude on the subsequent trading days: In the days following an eclipse, stocks recovered fairly quickly, Lepori says, thereby highlighting the market’s recognition of the irrationality of the eclipse-related dip.

Since the financial crisis, the interest in more esoteric theories that explain investment behavior and challenge classic market performance models has been growing. Lepori’s research on superstition has elicited a significant amount of interest, and it offers financial advisors who employ behavioral finance methods in their practice one more parameter to take into account when assessing their clients’ attitudes and psychology.

Lepori has also investigated the relationship between investor mood and investment decisions and he has conducted research on the impact of Seasonal Affective Disorder (SAD) on the performance of the foreign exchange market.

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