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In your research, you have found that investor risk appetites vary by season. How so?

As daylight becomes less abundant in the fall and winter months, our moods respond accordingly. Many people can identify with the notion of ‘winter blues’; but at a more clinical level, psychologists have identified a condition called Seasonal Affective Disorder (SAD), which causes severe depression in a significant part of the population.

Early in my career, I was intrigued by the possible implications of this disorder on financial decision making. Findings from Psychology had long shown that when people are in a negative mood, they become more risk averse, and combined with my finance perspective, this all seemed to be part of the same big picture. My colleagues and I were able to show that, as daylight diminishes, people shun riskier assets like stocks; and when it becomes more plentiful, in the spring, they jump back into these holdings. In short, our moods and preferences vary seasonally, and this spills over into our financial decision making.

How prevalent is this effect?

Roughly 10 per cent of the global population suffers from severe SAD, but this varies by latitude. People who live in tropical zones are less likely to be affected than those who live, for instance, in parts of Scandinavia — some of which get only six hours of sunlight per day in late December.

My former Rotman colleague Mark Weber and I conducted a survey of faculty and staff at a large North American university, and we found similar results. What surprised us was that the other 90 per cent or so of our sample also experienced significant variation in mood across the seasons — but less severely. It turns out that most of us become more despondent in the darker seasons of the year; but a fraction of us become so depressed that we need medical help.

In one recent study, you looked at how mutual fund holdings are affected by these seasonal factors. Tell us what you found.

We considered how much money investors put into and take out of their mutual funds in various months, and again, we found strong evidence that seasonality is a key factor.

In the fall, when people are becoming somewhat more depressed and risk averse, we found a much lower appetite for risky categories like stock-based mutual funds, and a much greater appetite for ‘safe’ categories, like government bond funds. Then, six months later — as spring blooms and risk appetite returns — these flows switch in the opposite direction.

Our findings are statistically significant: We examined trillions of dollars’ worth of U.S. mutual funds for this study and identified seasonal flow differences due to mood in the tens of billions of dollars. We also considered mutual fund flows for Canada, and found similar results — albeit on a smaller scale, on par with the smaller size of our economy.

What is the broader economic impact of your work?

First, it provides further evidence that our mood influences the way we make decisions. As a result, at a policy level, when regulators are deciding if or how to intervene in financial markets — say, during a financial crisis — it would be sensible for them to take into account the time of year. If it is autumn, and markets are crashing (and perhaps not surprisingly, markets do tend to crash more frequently in the fall), we know that people might react more drastically than if that same event happens in the spring. It is possible to design interventions and regulatory responses, depending on seasons. That’s the key implication of my work.

Lots of other related behavioural findings are coming out, with broad societal impact. One study I read recently looked at mood as it is influenced by the amount of sleep people get, and how that pans out in election results. In a particular time zone, for instance, researchers found that the people who lived further east got less sleep that those who lived further west, and that this led to systematic differences in the way they voted on election day. As that paper suggests, candidates might want to widely distribute coffee on the morning of an election!

Another related finding is that when the weather is bad on election day, people make more risk-averse choices at the ballot box. So if it’s pouring rain, they are less likely to vote for candidates that are perceived as ‘risky’. This is broadly consistent with what we’ve found in financial markets.

As daylight diminishes, people shun risky assets and in the spring, they jump back into riskier holdings.

Tell us about your findings in Australia and other countries.

I mentioned earlier that flows into and out of risky mutual fund categories vary by season in places like Canada and the U.S.; but this effect basically flips in the southern hemisphere, because when it’s fall up here, it’s spring in, say, Australia. Basically, wherever it happens to be fall, that’s when people generally become more risk averse.

This finding was corroborating evidence for our notion that the seasons are at work behind this effect. Additionally, when we study stock market returns around the world, we basically find that people avoid certain stocks in the darker months, and this effect is stronger the more northern the country you consider. So, if you compare the U.S. with Canada, and then with Britain, and then Sweden, the seasonality in stock returns only gets stronger. And when we looked at countries like Australia, New Zealand and South Africa, this seasonality was exactly out of sync by six months. Our evidence is consistent across a broad range of countries.

How can the average investor incorporate these findings in order to optimize her portfolio?

The impulse might be to take what I’ve just described and try to translate it into some sort of ‘market-timing strategy’: but that is the exact opposite of what I recommend. The trick is not to try to time the markets — because in any given year, the effects we’re talking about can be completely swamped by larger economic factors that are fundamental in determining the dynamics of returns.

My advice would be to avoid market timing altogether, because the research shows that people who attempt to time markets perform worse, on average, than those who just buy and hold. It is a much better idea to stick with longer-term investing principles — to have a well thought-out formula for a long-range investing plan, for example, and to avoid buying or selling on impulse when things happen suddenly in markets.

Furthermore, if things are topsy turvy in your life, that is the wrong time to be making any kind of important financial decision. If you don’t feel confident about managing your emotions in the context of investing, one course of action can be to consider hiring an intermediary. There are a couple

of options on that front. One is to elicit the assistance of a fee-based financial advisor, to provide advice that is tailored to your specific situation, and isn’t influenced by commissions that more traditional advisors rely on.

Another option is the idea of a ‘robo advisor’ — a class of financial advisor that provides financial advice or portfolio management online with minimal human intervention, based in part on algorithms. This relatively new class of intermediary offers an array of portfolios that are customized to investors’ characteristics, such as age, risk preference, and so on. Fees for robo advisors are lower than mutual funds fees, especially in Canada, and the degree of customization they offer is higher than an investor would get with an exchange-traded fund or a mutual fund.

For people who want to take a more hands-on approach, another option can be to hold an assortment of exchangetraded funds rather than mutual funds. But then, you have to really be disciplined about trying to overcome those emotional urges when markets are choppy, or if your personal circumstances are anxiety-provoking.

What are the key takeaways for people working in an increasingly global investment landscape?

Our beliefs are largely a by-product of the environment in which we grow up, and in an increasingly global landscape — investment and otherwise — we are interacting more and more with people who were brought up under very different conditions. Culture and beliefs are largely inherited, so when people move to a different geographic region, they often bring with them ingrained regional and cultural biases and beliefs.

In parts of Italy, for example, the level of trust in institutions—including financial institutions — is very low, and in these regions, stock market participation is also very low. If, for cultural reasons, certain people aren’t participating in stock markets, that can have consequential spillover effects, including retirement preparedness and the economic growth prospects for an entire region.

As we become even more globalized, we need to be aware that every individual is a biological being with countless behavioural biases. We also have to be aware of this as we’re interacting with people who might have very different biases from us. In general, when we are designing the way we interact with each other — including decision making in our financial institutions — we need to be increasingly aware of the influence of culture and the environment.

Culture and beliefs are largely inherited, so when people move to a different region, they bring with them ingrained biases and beliefs.

Lisa Kramer is a Professor of Finance in the Department of Management, University of Toronto Mississauga and a Research Fellow of Behavioural Economics in Action at Rotman (BEAR). Her recent paper, “Seasonal Asset Allocation: Evidence from Mutual Fund Flows,” with M. Kamstra, M. Levi, and R. Wermers, was published in the Journal of

Financial and Quantitative Analysis and can be downloaded online. Her 2012 paper, “This is Your Portfolio on Winter,” can also be downloaded online. Rotman faculty research is ranked #3 in the world by the Financial Times.