Speaker 1: Investors have been in a good mood this week, perhaps after all the success at this year's Olympics. The gold medal count continues to rise for American athletes. The Dow, S&P 500®, and NASDAQ all trending higher today.
Speaker 2: India is in mourning after the death of its beloved Bollywood singer, Bappi Lahiri. The market seems to be matching that somber mood this week with the NSE falling another 250 points.
Katy Milkman: It's tempting to think of the stock market as a coldly rational exchange of value based on economic fundamentals. But there are many factors that can influence how the market behaves, for better or for worse. In this episode, we look at how seemingly unrelated things, like the sports teams we cheer for and the mood we're in, can affect the market and many other aspects of our lives.
I'm Dr. Katy Milkman, and this is Choiceology, an original podcast from Charles Schwab. It's a show about the psychology and economics behind our decisions. We bring you true stories involving life changing moments and then we explore how they relate to the latest research in behavioral science. We do it all to help you make better judgments and avoid costly mistakes.
Our first guest comes to us from the future.
Jamie Wall: We're a day ahead of you, but I think in terms of fashion and music, we're about 20 years behind. So …
Katy Milkman: OK. Not the future, but certainly a distant time zone.
Jamie Wall: Hi, my name's Jamie Wall. I'm a rugby writer and author based in Auckland, New Zealand.
Katy Milkman: Rugby might seem a bit strange to the uninitiated, but it's not so different from American football.
Jamie Wall: It's American football, but without the pads and the helmets. The key concept of the game is the same, just to get the ball into the opposition's end zone, or we call it a try line, and to score a try, or what you guys would call a touchdown. And it's roughly the same, except you can't pass the ball forwards and you kick it a lot more. But other than that, it's a game I think Americans … you'd probably appreciate because it's very physical, and the U.S. actually does have a national team, and they've competed at the World Cup.
Katy Milkman: While it's not a major sport in the U.S., rugby is huge in New Zealand.
Jamie Wall: Yeah, it is a big deal. It's our national sport, and our national team's called the All Blacks, because that's what they wear. A black jersey, black socks, and black shorts. And they are generally regarded as the best team in the world. New Zealand's such a young country there's not an awful lot to get patriotic about. And this is one of the things where it's a safely patriotic thing to do. People from all walks of life will watch the All Blacks and get excited when they win and get disappointed when they lose.
Katy Milkman: Where an American football game might start with a marching band playing the national anthem, the All Blacks in New Zealand begin their matches with a distinctive tradition, the haka.
Jamie Wall: Every time they play, the All Blacks perform a haka. It's a cultural challenge. It's often called a war dance, but that's not the right way of explaining it. It's a Maori challenge, Maori being the indigenous people of New Zealand, and it's literally a performative dance that involves a lot of slapping of the thighs and slapping of the chest. It appears to be quite aggressive, but what it's really doing is showing your opposition, "We're up for this challenge that you've brought to us." And it's a really important part of our culture here in New Zealand.
Katy Milkman: A rugby game is a boisterous affair, but different in its sounds and sights and smells than, say, soccer or football.
Jamie Wall: If you ever get hot chips—like french fries, right? Like we have them, we cut them quite thick in New Zealand and boil them and deep fry them. And to me, that's what rugby smells like is the smell of that and ketchup on it. That's kind of what the stands smell like. That and beer as well. And if you are at a club game where you're right up next to the field, you can smell the mud, and you can hear the slap of guys colliding with one another, and a lot of foul language if you're close enough to the pitch to hear the actions. When I was a kid, I remember really clearly walking into the old ground in my old hometown in Wellington and sitting there and watching a guy just make a break and score a try. And the crowd just went up, and I'd never heard anything like that before. And it just gave me just this amazing lift. And I thought like, "Man, now this is where I want to be. This is home for me right here amongst these people."
Katy Milkman: Now that you have a sense of how Jamie Wall and many other New Zealanders feel about rugby, I want to take you to an important event. The 2011 Rugby World Cup. The tournament happens every four years. The last time the All Blacks had won it all was in 1987. The 2011 Cup was scheduled for October at Eden Park in Auckland, 24 years after their last win at the very same stadium.
Jamie Wall: This was a real point of contention for New Zealanders because this is the one thing we are supposed to be the best at. And yet we weren't officially the best at it. And it seemed like every time the All Blacks would go to the World Cup and lose, it would get harder and harder to accept. And so when 2011 rolled round, we were hosting it, we had a very good team, very good captain, very good coach. And everyone thought like we have to win it this year. You know, it's all stacked in our favor. So there was a lot of expectation on the team.
Katy Milkman: Hosting the Rugby World Cup was a massive undertaking. It's the third largest sporting event in the world, with an expected 85,000 visitors arriving in the country and millions of television viewers worldwide. It also happened to coincide with the end of Prime Minister John Key's first term in office. Unlike the U.S., the government of New Zealand can choose the timing of national elections. In a surprise move, Prime Minister Key announced the election much earlier than was required and set the election date after the Rugby World Cup final.
John Key: So today I'd like to announce that the general elections will be held on Saturday, November the 26th. My announcement of the election day today is, as you're aware, a break from tradition. I believe it's in the country's best interest to know the date of this year's general election early, because it gives New Zealand certainty and allows them to plan accordingly. For those involved in the …
Katy Milkman: Some in the press speculated that Key's early announcement was strategic, that he was hoping a win for New Zealand would bolster his chances of securing re-election.
Mona Krewel: And announcing the date early actually gave him some advantages.
Katy Milkman: This is Dr. Mona Krewel. She's a lecturer in political science at the Victoria University of Wellington in New Zealand.
Mona Krewel: So the general election cycle would start as soon as he announced the date. And that meant in such a year with the Rugby World Cup, he, as an incumbent, would have a lot of opportunities for campaigning around that event and thereby profiting from a generally good public mood. And it also made a lot of sense for him to announce the date early, because then he could directly switch into that campaigning mode at that time.
Katy Milkman: There were events in recent political history that may have informed the prime minister's thinking.
Mona Krewel: In 1987, when New Zealand was a winner and a host, they won the World Cup on June 20th, 1987. And a general election was held in August with Labour returning for a second term of government with an increased majority, actually.
Katy Milkman: It's not clear how much the Rugby World Cup win in 1987 moved the needle in terms of the incumbent government gaining an advantage. But there is some evidence that we'll cover in more detail later to suggest that losing the World Cup right before an election can have an effect on how some people vote.
Mona Krewel: In the 1999 election then, it might have put the final nail into the coffin for the national government. It was not helpful for the government that New Zealand has been knocked out of the Rugby World Cup.
Katy Milkman: So it may be a coincidence that the World Cup win was followed by an incumbent winning an election in 1987, and that a loss in the World Cup was followed by an incumbent losing an election in 1999, but maybe not. Let's return to 2011. Here's Jamie Wall.
Jamie Wall: Going into the World Cup, the results have been pretty good and the squad was healthy and guys were peaking at the right time, if you know what I mean. And so everyone was feeling pretty good, getting excited at the thought of winning, and because it was being hosted in New Zealand, it seemed to overtake people's consciousness even more than it normally would. Even if you didn't like rugby, you kind of had to buy into it because you couldn't turn around without seeing it. There were flags flying everywhere, and New Zealanders aren't particularly patriotic people, but all of a sudden it was kind of OK to do that.
And then all of a sudden it got to the point where the games started to count, the knockout stages of the tournament, and our best player got injured. And all of a sudden, the mood went. … And it was just this terrible tragedy that Dan Carter had hurt himself. He was playing in a position that, if you watch football, it's the same as being a quarterback, basically. So he's our most important player, and he hurt himself. And all of a sudden that meant that we weren't looking as steady as we were before. So it was a real roller coaster as we went along.
Katy Milkman: Despite injuries on the team, the All Blacks played well during the tournament. They were unbeaten going into the final against France on October 23rd, 2011. The Eden Park stadium was filled to capacity. Tickets were scarce and offered through a lottery, and Jamie missed out, so a TV screen would have to suffice.
Jamie Wall: We found a big bar down on the waterfront to watch, and we actually snuck in the back and managed to get some good seats. And it was just wall to wall. Like everybody was rammed in there really close. I think the game kicked off at 9:00, and we had to get in there at like 3:00. So we had to sit there for six hours before the kickoff started. We were up against France, who were a notoriously unpredictable team. They were a team that had a history of upsetting the All Blacks in key games like this. So at the back of everyone's minds was like, oh no, they might do that again. If there's one team that we kind of can't rule out beating us, it's France. They'd beaten us in two previous World Cup knockout games, so it was pretty tense.
Katy Milkman: As the game got underway, it became clear that the teams were well matched. The All Blacks were leading five to nothing in the first half. This is a low score compared to a typical match.
Jamie Wall: Usually in a rugby game you score about 20 or 30 points. Generally, it's about the same as an American football game. So to have only scored five, or one touchdown, at that point was a bit of a surprise. And so we all knew that any points we could get were going to be incredibly crucial. And what do you know, our goal kicker, who was at that point our third-choice goal kicker, went down injured. And there was a guy on the bench called Stephen Donald who had last played for the All Blacks a couple of years as before and had made a pretty bad error that had cost the All Blacks the game. He hasn't played a game in a few months. He's a bit out of shape. And he also has to wear a jersey that is for the guy who was supposed to be in his place, who was a lot smaller than he was.
So he's wearing this tiny jersey. And as he's running on the field, he has to pull it down because his gut's kind of hanging out the side. And people hadn't forgotten about his mistake that he'd made before. So I remember the bar that I was in, people were like, "Oh no, we've lost" and banging on the tables and being like, "Oh no, this is terrible," because by this stage, the mood was really, really tense because it was like, are we only going to get through this game by only scoring one try? Like are we going to have to fight right till the end?
Katy Milkman: The first thing Stephen Donald had to do was a penalty shot at goal. It's kind of like a field goal, and it's worth three points. If he makes the shot, it means France has to score twice in order to win the game.
Jamie Wall: So it's a very big kick, and it's the first thing he does. And he absolutely nails it. It goes straight through the posts. And turns around and everybody's perception of him changes like straight away, like, "Yes, he's the man for the job." And he keeps going through the game and makes his tackles, and France score a try to make it eight points to seven. And the last 20 minutes of the game is essentially just the All Blacks tackling them, which it was very hard to watch. I personally, I didn't even watch it, I couldn't watch it. I had my head between my legs the whole time. Everybody else in the bar just couldn't watch, couldn't watch, and was just praying for the final whistle to go. And then it came, and it was unbelievable. It was just the most unbelievable feeling that I've ever had watching rugby anyway. It was incredible and like, this guy is a hero, this guy is the king of New Zealand as far as we were concerned.
Katy Milkman: There was euphoria across the country. The All Blacks had squeaked by France in what was the slimmest margin for a win in Rugby World Cup history. Prime Minister John Key must have breathed a huge sigh of relief. In a year that had also seen a devastating earthquake rock the city of Wellington, this win for the All Blacks meant that the country was now in a jubilant mood.
Jamie Wall: Yeah, it was massive because of … there was an entire generation of people that had grown up without having known the All Blacks winning the World Cup. It's the biggest prize in the sport, and it only comes around every four years. Rugby's a big thing in New Zealand, and the All Blacks are a big thing. So when they won, everyone was in on it. You go down the street, there's people driving up and down the street beeping their horns. And it was just going all night, and all the bars were overflowing. People were just out on the street waving flags and things. And it was just a kind of a unique experience. They had a victory parade. There was a public holiday on the Monday, and so there was a huge turnout for that.
Katy Milkman: That national celebration carried on in the days and weeks after the final match. The question now was, would that euphoria translate into more votes for the incumbent prime minister, John Key, in the November election? Here's Mona Krewel again.
Mona Krewel: There is actually research for the U.S. about college football and election results on all kinds of political levels from presidential election to mayoral elections. And that actually shows that this can actually boost between 1 and 2.5%. So there is an effect. What it does in any case is usually kind of spill over on the candidate's popularity. The same research for Germany that has also shown that basically if your local football team wins, this has a positive effect. This effect has definitely been shown all around the world for sport events and elections if they are close to each other. And of course, some elections would have taken a certain turn anyway, but yeah, at least it didn't hurt John Key in 2011.
Katy Milkman: That's an important point. It didn't hurt John Key. Whereas the incumbent party lost in 1999 after a disappointing World Cup showing from New Zealand, John Key kept his job as prime minister after the 2011 World Cup victory when his National Party captured approximately 48% of the vote in the election. It was the largest total for any party since New Zealand moved to proportional representation in 1996. Key's party won 60 seats in the House of Representatives and maintained the support of its coalition partners.
John Key: Ladies and gentlemen, I always said it would be tight, and I was right. But what I can tell you is that for another three years, there will be a National-led government in New Zealand.
Katy Milkman: But how much can we attribute Key's success to that of the All Blacks? More on that in a bit.
Mona Krewel is a lecturer in comparative politics with a specialization in the study of elections, political parties, and public opinion at Victoria University of Wellington in New Zealand. Jamie Wall is an active rugby player and writes about the sport, including the bestselling book Brothers in Black. He's based in Auckland. I have links in the show notes and at schwab.com/podcast.
Katy Milkman: It's difficult to tease out what effect the Rugby World Cup win had on New Zealand's election because elections are affected by many variables. But there is evidence that a loss might have had a negative impact on John Key's campaign. We'll get to that in a bit. But first, what we're looking at here is how sentiment from one arena—the world of sports, for example—spills over into another: in this case, politics. We see this emotional spillover in other areas as well. A breakup of a relationship might spill into a decision at work. An unseasonably nice day might lead you to spend more money on a new car. My next guest has studied the impact of mood on stock-market performance, looking at both the impact of major sports team losses on markets and national sentiment measured by the type of music we stream at a moment in time. Alex Edmans is a professor of finance at London Business School, where he focuses on corporate governance, responsible business, and behavioral finance.
Hi, Alex, thank you so much for joining me. I'm really excited to have you.
Alex Edmans: Thanks so much, Katy, for the invitation. It's great to be here.
Katy Milkman: Well, I'm thrilled to have the chance to talk to you about sentiment, or what most of us call "mood," because I know very little about it. I'm hoping you could describe some of the fundamentals of what we know about how feeling good versus feeling bad changes people's decisions.
Alex Edmans: Yeah, absolutely. Actually, what we looked at was not so much the effect on judgment, but the effect of sentiment on other outcomes. For example, there's health outcomes of sentiment, and some of these are quite unfortunate. So when England lost to Argentina in the 1988 World Cup, heart attacks shot up over the next few days. When the Montreal Canadiens were eliminated from the Stanley Cup, people commit suicide more over the next few days. And then in the U.S., when a team gets knocked out of the NFL playoffs, you find homicides go up.
So what is surprising is that the effects of sentiment can be so large that it can lead to sometimes life-or-death situations. Also what's interesting about sentiment is that the effects are widespread. So it's not that you just see something and you are happy or sad about that particular dimension. It actually affects into your positivity about life in general. For example, when Ohio State football team wins games, then people around the area buy more lottery tickets. Now there's no clear rational reason why this will be, but it is that people's happy sentiment is not just confined to their team. It spreads over to just general positivity about life in general.
Katy Milkman: It's so fascinating. OK. Thank you for giving some of that background on prior research. I would love now to dive in a little bit to some of your work on the impact of sentiment or mood on the stock market. Maybe you could start by describing some of the work you've done looking at sporting events and how they change market outcomes.
Alex Edmans: Absolutely, but before starting my work, let me give some props to other people because we were not the first to link sentiment to the stock market. So other people tried to look at measures of mood that affect the economy. And what's difficult here is that many plausible measures of moods might have an economic effect. So you might say people's sentiment are as affected by something like a plane crash. But if we found that, after a plane crash, the stock market went down, people might think, well, that's just standard economics, right? After a plane crash, then people are going to be traveling less—there's effects going to be on the aviation industry. Similarly in an election, that affects sentiment, but there could be an economic impact. So the real trick here is find a measure that shocks sentiment but has no real economic impact. And so what people before me looked at were some weather variables.
So you can look at things like daylight or cloud cover and so on and hypothesize that when it's cloudy or sunny, that's going to affect sentiment, and it's going to feed through to the stock market. And those papers were statistically robust and they were published in the top journals, but what concern that people might have is they could have just got lucky, right? So you have some correlations, which might be spurious. And one concern is that, well, is the effect on whether strong enough to feed through to something as rational and hardhearted as the stock market? Particularly since traders—they work in air-conditioned offices—they're pretty immune to what weather conditions are going on outside. And also, a challenge with weather is that it's a local variable. So it might be sunny in New York City, but it could be windy in Chicago, and it could be Chicago hedge funds that are driving the stock market.
So a challenge with some of these earlier variables is they might not be very strong, and they might not be national. So that brings you to sports, which is what I looked at a number of years ago. And so what I looked at with my coauthors, Diego Garcia and Oyving Norli, was the effect of international soccer elimination on the stock market. So why soccer? Is that my English bias? Why didn't I look at Major League Baseball? But it's because of the national effect, right? If the Red Sox win and the Yankees lose, some Americans are happy and others aren't happy, where something national like soccer, if England lose, that will make the whole of England depressed, and that should feed through into the stock market going down.
Katy Milkman: I love that. It's an excellent reason to do that. And could you talk a little bit about exactly what you found?
Alex Edmans: Yeah, absolutely. So what was the research design? So what we looked at was not just England. We wanted to look at many, many countries throughout the globe. And also what's really important is we would need to control for other determinants of the stock market. So if England lose and the stock market goes down, maybe we just got lucky. Maybe the stock market could have gone down anyway. So what we control for is what's happening to the world market on the same day. We also had to control for past returns because there's some evidence of momentum. And also we control for day-of-the-week effect. So there's prior research show the market tends to do better on Fridays and less well on Mondays, perhaps because of sentiment effects.
And we found this effect was really strong within soccer, in terms of economic significance, when you get knocked out of the World Cup, the market falls by half a percent on the next day. Now, you might think, half a percent, is that a lot? Well, applied to the England stock market, it's $15 billion wiped off the market on a single day just because England can't take penalty kicks. And you might still think, well, 15 billion, why sometimes the market falls by more than that. But when the market falls by more, it's for rational economic reasons. Yes, you could have the market falling because of coronavirus, because of an election, but something like soccer that really shouldn't affect the stock market, but it does so to a big degree.
Katy Milkman: It's such an awesome finding.
Alex Edmans: Then we went to go a little bit further and think about, well, where should the effect be stronger? It should be stronger in countries where soccer is more important. So we found it was stronger in England, France, Germany, Spain, Italy, Argentina, and Brazil, the soccer-crazy countries. Now, what's the effect in the U.S.? Actually nothing, which probably makes sense to the American listeners—they don't really care about soccer. But what do they care about? They might care about other sports like basketball. So what we then did is we looked at other sports, rugby, cricket, basketball, and ice hockey. And we found that those also had significant negative effects. So it's not just unique to soccer. There's generally a negative mood on a nation when they lose a major sporting event.
Katy Milkman: And what about when they win?
Alex Edmans: Unfortunately, when they win, there is not a positive effect. So unfortunately sports are only having negative outcomes, a decline upon a loss, but no rise upon a win.
Katy Milkman: That's so disappointing. And do you think it's because of loss aversion? That losses loom larger than gains, and so that's why we only see this downside from sporting losses?
Alex Edmans: Absolutely. So loss aversion could well be one reason. So it is that the pain of losing is much greater than the elevation of winning. But there could be a couple of other reasons. So one other behavioral reason is overconfidence, where if you've got supporters who always go into a game thinking that they're going to win, well, if you do win, you're not too surprised, but if you lose, you’re bitterly disappointed. And the third reason is a bit more sort of technical. It depends on the competition format. Because these are knockout competitions, if you lose, you're instantly eliminated. If you win, you still haven't won the championship. You’ve still got many further games to play. So there's an asymmetry in how the competition is struck.
Katy Milkman: So interesting. I noticed you have a new paper on the music people are listening to in a country at a point in time and how that relates to stock market performance and sentiment. And I was wondering if you could tell us a little bit about that project as well.
Alex Edmans: So all of the papers that I've mentioned previously, what they do is they study shocks to sentiment. So it could be soccer results, it could be clock changes, it could be weather, and then they assume that those things affect people's sentiment, and then it feeds through to the stock market. However, all of those measures, they only capture one driver of sentiment. So how are we feeling on a particular day? Yeah, maybe I'm upset that my soccer team lost, but maybe I'm happy because I got a promotion at work or maybe COVID restrictions are easing and so on. So rather than having an exogenous measure, that shock sentiment, what I want is an endogenous measure, which reflects how happy you are feeling. Now, that's pretty difficult because many of the things that your emotions will manifest, you can't observe as an empiricist. So let's say if I start swearing all the time because I'm angry, hopefully that's not going to be captured by Alexa and be fed through to some systems. So I can't look at something like that.
Katy Milkman: Maybe Google.
Alex Edmans: Well, maybe in the future you might be if they have all these clever ways of getting data. You might think, well, why don't you look at consumption, right? Because if I'm happy, maybe I'm going to go buy stuff. But the challenge there is that consumption is not available at high frequency. You might get it at the monthly level at best. And also it's really difficult to say whether consumption is positive or negative. So if I buy alcohol, I could buy it to celebrate, or I could buy it to commiserate, so you don't know.
So what we chose to look at is music. And so why is that? So there's a lot of prior research in the psychology literature documenting what's known as emotion congruity, i.e., you listen to music that just reflects how you're feeling. That's why we play happy songs at parties and sad songs at funerals. So what we thought was that you can use the positivity of the songs that you listen to as they measure that reflects how happy people are feeling. Now you can get this aggregate across a whole country through Spotify, and you can get it on a daily basis. And what's particularly important is that Spotify has an algorithm to study the positivity of the music. And does the valence make sense? Well, one of the songs which was scoring really high was, not surprisingly, the song "Happy" by Pharrell Williams. And then you have some sad Adele songs or some sad Coldplay songs right at the bottom.
Katy Milkman: That's so cool. And then you looked how what music people are listening to on Spotify in different geographies relates to stock market returns?
Alex Edmans: Absolutely. So what we did is we got 500 billion streams of 58,000 songs across 40 countries. And again, why is it important to have such a large cross section? Because of spurious correlation. People are quite skeptical about sentiment research, so if you found it in one country or even five countries, people might think you got lucky, but if you look at 40 countries, maybe there's something there. And we did something relatively similar to the soccer paper. What we looked at were the sentiment of a country as reflected in the music listening and then linked this to the stock market, controlling for what was happening in the world economy and also economic policy, uncertainty, and a lot of those other variables. Also, we went beyond soccer paper because we didn't just look at the stock market. We looked at two other outcomes.
One of them was mutual funds. So rather than just buying stock directly, many people, particularly nowadays, they buy into funds. And what we've found is that when they are in a better mood, they're buying more into mutual funds. But then finally we did a falsification test, which is a test that should go in the wrong direction. We looked at government bonds because if indeed people are feeling more positive, and they're willing to take more risks because of their positivity, yes, they're investing more in stocks, yes, they're investing more mutual funds, but the money has to come from somewhere. And government bonds are sort of the safe asset, which you're going to be selling out of if you want to move into something risky. So we indeed found the positive effect on the stock market, positivity in terms of mutual funds, but an outflow from government bonds, all consistent with the hypothesis.
Katy Milkman: I'm curious if there's anything you do differently in your own life, and I don't mean in terms of your investment decisions, I just mean your day-to-day, as a result of studying how mood can affect choices.
Alex Edmans: I think it's just to realize my own human fallibility. It’s that often I myself might be affected by sentiment in many, many ways. So, when I was young, the very first thing I did was I was playing chess. So I started when I was five years old and played for the England junior team. And one of the things that I was quite bad at was I would make sort of some rushed moves. And so what my chess coach told me was just to sit on your hands. Even if I think there's an obvious response, sit on my hands so that I would not be able to make the move. And I think that should be the same for important decisions to do the analogy of sitting on your hands rather than rushing to make a decision.
And I probably to do this with my email. So sometimes I send emails when, in the cold light of day, could I have been a bit kinder or much kinder? Probably yes. So what I have with my emails is I have a delay, so after I send the email, it has a delay and it sits in my outbox for a couple of minutes. And then I often will think, well actually, did I need to phrase it that way? Often it might be unnecessary. So I can go back in and do this. Or if it is an email which might be contentious, I might show this to my wife, and so she might have a look at this, and that will, again, try to address the issue. So again, what you're trying to get other people to weigh into your decision to make sure that decision was not just driven by you and your particular emotions. And so the idea of never sort of letting the sun go down on your anger, sleeping on these decisions until the next day and making them with a clear head, is really important.
Katy Milkman: I absolutely love that takeaway. We should all sit on our hands more, and I'm going to have to copy and paste your two-minute email rule. That's fabulous. That's a fantastic place to wrap up because it's just such a good additional insight. You know, not only does it matter in terms of understanding how the stock market works and when there will be ups and downs, but just in thinking about your own life, that we are affected so deeply by our emotions, and sometimes we're not in the right mode to make a decision. Alex, thank you so much for sharing that. And thank you for taking the time to talk to me about all of this today. It has been an absolute pleasure.
Alex Edmans: Thanks so much, Katy, really enjoyed it.
Katy Milkman: Alex Edmans is a professor of finance at London Business School and the current Mercer School Memorial Professor of Business at Gresham College. He's also the author of the recent book Grow the Pie: How Great Companies Deliver Both Purpose and Profit. You can find links to his book, as well as his research on the relationship between sentiment and the stock market, in the show notes and at schwab.com/podcast.
Whether it's an irrational reaction to the movement of a stock’s price or something completely unrelated—say, your favorite sports team's recent performance—it's hard to separate emotions from investing. Check out the Financial Decoder podcast for some tips on how to mitigate emotional biases when trading stocks and making other financial decisions. You can find it at schwab.com/financialdecoder or wherever you get your podcasts.
When we're in a good mood or a bad mood, even if it's for an arbitrary reason, our feelings spill over and affect unrelated decisions. Decades ago, a famous psychologist from Cornell named Alice Isen did a number of classic studies where she surprised people with an unexpected bag of candy to boost their mood and explored the effects on their subsequent behavior. Doctors who received such gifts made better decisions, and ordinary people became more creative problem solvers when delighted by these small mood boosters. Isen proved that a positive mood can have many benefits—though it can also lead you to take on mild risks that would usually be unappealing.
Being aware of the way your mood spills over to unrelated decisions is helpful. It can teach you to sit on your hands and avoid making important choices at a moment when you might be swayed by a temporary reaction to some good or bad news that isn't really relevant: say, the outcome of a sporting event or the receipt of an unexpected gift or an annoying commute.
In his research on music sentiment and stock returns, Alex Edmans and his collaborators found that a positive national mood, as reflected in music choices, was correlated with positive same-week stock returns, but the next week, the effect typically corrects itself.
So if I leave you with one takeaway today, I hope it's this: Be aware that your choices are never really independent of your emotional state. When you're feeling great or disappointed, even if that feeling has nothing to do with a subsequent choice you have to make at work, at home, or about a stock or political candidate, those feelings may well affect your decision. For example, you should be careful when talking about your risk tolerance with financial advisors when you're at an emotional extreme. Knowing this can help you postpone choices you might not want to make under the influence of your mood.
You've been listening to Choiceology, an original podcast from Charles Schwab. If you've enjoyed the show, we'd be really grateful if you'd leave us a review on Apple Podcasts. You can also follow us for free in your favorite podcasting app. And if you want more of the kinds of insights we bring you on Choiceology about how to improve your decisions you can order my book, How to Change, or sign up for my monthly newsletter, Milkman Delivers, at katymilkman.com/newsletter.
Next time, you'll hear about a bias that clouds the way we view the value of stocks, the efficiency of our cars, and the dangers of disease. I'm Dr. Katy Milkman. Talk to you soon.
Speaker 8: For important disclosures, see the show notes or visit schwab.com/podcast.
