MONEY Investing? Don’t let March be madness
Research shows sports fans often let their emotions get the best of them
It’s called March Madness for a reason.
Basketball fans aren’t thinking about the stock market when they refer to the annual college tournament that begins this week as “March Madness.” But the description still fits.
That’s because researchers have found that the agony and ecstasy fans feel when their favorite teams win or lose can lead them to do foolish things with their investment portfolios.
The most cited study of the interplay between sports and investing appeared a decade ago in the prestigious academic publication The Journal of Finance.
The study, “Sports Sentiment and Stock Returns,” was conducted by finance professors Alex Edmans of the London Business School; Diego Garcia of the University of Colorado Boulder; and Oyvind Norli of the BI Norwegian Business School.
The professors focused on more than 2,600 widely followed sporting events at major international tournaments involving soccer, cricket, rugby, hockey or basketball.
On average, following the elimination of a nation’s team from those tournaments, its stock market performed significantly worse. The researchers were unable to find any rational economic explanation for why this should happen.
It is interesting to note that the professors found a much smaller positive effect on the stock markets of countries whose teams won.
The implication of this imbalance is that global stocks, on average, should be below-average performers during widely followed competitions such as the World Cup or the Olympics. And, sure enough, other studies have found this to be true.
Because the professors focused on national teams in international competitions, they did not study the effect of March Madness games on the U.S. market. But, in an email, Edmans said the same principles would still apply.
The U.S. stock market should therefore face stronger-than-usual obstacles to growth over the next couple of weeks.
Note, however, that the expected decline in the stock market’s return because of March Madness is too small to justify paying the commissions and taxes on a short-term trade.
A more appropriate lesson to draw is this: Do nothing with your portfolio for several days af- ter your team loses.
Many of you will have difficulty accepting that your investment behavior is affected by something as irrelevant as whether your favorite team wins or loses.
But there is an impressive body of psychological research showing that our moods often trump our rational investment analysis.
Factors influencing market psychology include whether New York City is sunny rather than cloudy; whether it’s closer to a new moon than a full one; and the impact of investors’ Seasonal Affective Disorder on their portfolio decisions.
Given this extensive research, it would be surprising if your favorite teams’ loss didn’t sway your investment behavior.
The broader lesson of March Madness is that you should do whatever is necessary to protect your portfolios from your moods. You should have a prearranged game plan for what you will do with your portfolio and when, and then develop the will power to stick to it.
If you do that, you can fully enjoy March Madness over the next three weeks, secure in the knowledge that you won’t compound your favorite team’s losses by doing something stupid with your investments.