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December 20, 2010 at 07:00 PM
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.
