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Your analysis of the stock market is almost certainly biased. That’s because our brains are hard-wired to see the world through colored glasses. Sometimes those glasses will be rose-colored, and at other times they will make the world seem gloomy and hopeless. But they almost certainly will never be perfectly clear and unbiased.
Investment success therefore requires us to recognize our biases and take steps to immunize our investment decisions from them.
Consider the performance of the French stock market on Monday of this week, the day after France lost to Argentina in the World Cup final. The French stock market lagged the average European stock by a significant margin — 0.9 of a percentage point, as judged by the iShares MSCI France ETF
EWQ,
and the iShares Europe ETF
IEV,
France’s loss almost certainly played a big role in this sizeable underperformance. That’s according to a famous academic study entitled “Sports Sentiment and Stock Returns,” conducted by finance professors Alex Edmans of the London Business School; Diego Garcia of the University of Colorado Boulder, and Oyvind Norli of the Norwegian School of Management. They analyzed more than 1,100 soccer matches back to 1973, finding that when a country’s soccer team loses in the World Cup, its stock market the next trading day produces a return that is significantly below average.
One consequence of this result, according to another academic study, is that global equities generally are a below-average performer during the entire World Cup. That’s because the tournament inevitably produces a steady stream of losing countries, and there is no correspondingly positive stock market effect for winning countries. As I pointed out in a column before this year’s World Cup competition began, the U.S. stock market during past world cups has lost an average of 2.58%.
That’s remarkably close to the 3.6% loss the SPDR S&P 500 ETF
SPY,
incurred during this year’s World Cup (from its close prior to the first game to its close the day after the final).
Could it be that the World Cup is why the much-anticipated Santa Claus Rally has not yet materialized?
Sports sentiment isn’t alone in affecting the stock market
The academic literature is filled with similar examples of how our moods and emotions affect our investments. Other studies have found that the stock market is influenced by factors as diverse as: the lunar cycle; the shift to daylight savings time; seasonal affective disorder (SAD); whether the day is sunny or cloudy, and whether the most downloaded songs on Spotify are happy or sad.
The key takeaway from these studies is that our moods and emotions operate unconsciously on how we make decisions. And because we aren’t aware of their influence, we can truly believe we’re being objective when in fact we’re being biased.
One of my favorite examples dates back to the weeks before the Gulf War in 1990, when researchers surveyed football fans’ beliefs about whether the war would occur and, if so, how many casualties there would be. The researchers found that “distraught fans deemed a feared war with Iraq significantly more likely and devastating, in loss of life, than did their ecstatic counterparts.”
Another illustration is sports fans’ conflicting beliefs about referees’ fairness. Richard Thaler, a professor of behavioral science and economics at the University of Chicago, and the 2017 Nobel laureate in economics, pointed out in an email that “experiments show that fans of each team watching the same game think the referees were unfair to their team.” He added that “it is almost impossible to debias yourself from these things.”
The solution? Stick to a financial plan, devised well in advance, that specifies how you will respond come what may. Don’t wait until after some unexpected event upsets your emotional equilibrium. If you do that, you almost certainly will be analyzing the situation in an unconsciously biased way and making poor decisions.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
More: Why the stock market gets a red card during soccer’s World Cup
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