You’ve heard of behavioral finance. But what about physical finances?


Over the past decade, the amount of research on behavioral finance (or BeFi) has exploded to such an extent that what is being said on the subject today seems almost banal.

In summary, people are not perfectly rational economic machines when it comes to making financial decisions.

The fact that the decisions we make do not match the mathematically optimal outcomes of traditional economic decision-making models is not a function of purely psychological factors. A physiological phenomenon occurs. The human nervous system is a complex network of cells that uses communication from sensory input from different parts of the body to coordinate our behavior. This communication takes place directly through electrical synapses or neurotransmitters.

In fact, research has begun to directly map the concept of behavioral finance to specific neural pathways.For example, loss aversion — the psychological pain of losing is greater than the pleasure of gaining the same amount — is currently Associated with activity in the ventral striatumA brain region involved in the processing of dopamine, a neurochemical associated with reward and pleasure. The study shows that people who are less averse to loss have less neural activity in this part of the brain.

Other research Higher levels of cortisol, a type of steroid similar to testosterone, have been demonstrated to correlate with more aggressive risk-taking behavior. have also been shown to trade aggressively and aggressively. Even more so than women.

And to be clear, such research shows that it influences behavior in areas other than finance as well. has been found to be an important factor in

Since our physical world affects our nervous systems and how we process sensory input, it makes sense that environmental changes can also affect how we make decisions.

Seasonal Affective Disorder (SAD) is a good example. SAD is a type of depression associated with seasonal changes. About 5-10% of people have SAD, and its symptoms include sadness and anxiety, extreme fatigue and lack of energy, difficulty concentrating, loss of interest in many activities, and hopelessness in winter. Feelings of worthlessness and worthlessness.

The exact cause of SAD is not known, but lack of sunlight is known to be one of the main causes. Sunlight helps regulate and stimulate the production of serotonin, a neurochemical that contributes to feelings of well-being.

Sunlight also helps produce vitamin D. Vitamin D also boosts the activation and release of serotonin, so less sunlight is a double whammy for people suffering from SAD.

One consequence of this depression and loss of interest in activities is reduced risk appetite, which has been documented in a variety of behaviors. Researcher at the University of Toronto We looked at stock market returns for four markets: Stockholm, London, Frankfurt and Toronto. Winters in these cities are cold and dark, but they are not equidistant from the equator. Some are farther and therefore darker than others.

Researchers have found that seasonal patterns in stock markets (such as excess winter returns, often referred to as the Santa Claus rally or holiday effect, and low returns in late summer and early fall) roughly match the hours of sunshine in various markets. discovered.

Including South Africa and Australia (southern hemisphere countries with reversed seasons), the authors found that stock market patterns also reversed.

They concluded that a lack of sunlight contributes to a decrease in the risk appetite of market participants in winter and vice versa in summer. Since lower risk appetite leads to higher risk premiums, and higher risk premiums lead to higher returns, the strong association between distance from the equator, sunshine hours, and market cycles cannot be due to chance alone. , these authors argued.

However, recent research has revealed that the market’s risk appetite cycle is associated with another type of solar activity.

with attractive work Posted on LinkedInmarket research firm Focused 15 Investing, details part of its work examining the physics-based variables that correspond to proprietary market-based risk aversion measures.

First, the company describes a model of risk aversion. This is a unique model combining signals and trends that was developed nearly ten years ago. The model, which the firm calls his Micro Market Resilience Index, has been shown to do a pretty decent job of tracking the cycles of official stock indices like the Dow Jones Industrial Average.

Over the years, the company has noticed a repeating pattern in its risk aversion cycle. And despite changes in demographics, communication technology, and economic externalities, these patterns have remained relatively consistent over time.

This is where things get interesting.

Hoping to improve its model, the company commissioned data scientists and mathematicians to uncover variables associated with these regular patterns it observed. Digging into the body of research, one paper in particular stood out. It is a working paper of the Federal Reserve Bank of Atlanta “Playing in the Field: Geomagnetic Storms and the Stock Market

In this paper, two Fed economists linked geomagnetic storm activity to stock market returns. Geomagnetic storms are disturbances in the Earth’s magnetic field caused by the eruption of plasma and radiation from the surface of the Sun during solar storms. medical research Already linked geomagnetic activity with adverse effects on human health. In this case, unlike direct sunlight, higher levels of this type of solar activity increase depression and reduce risk appetite.

The Fed’s paper clearly showed that abnormally high levels of geomagnetic activity have a statistically significant negative impact on next week’s stock returns for all US stock indices. In addition, the study also provided evidence that stock returns were significantly higher around the world during periods of quiet geomagnetic activity. Higher geomagnetic activity lowers stock returns and vice versa.

By incorporating data on solar activity and similar variables, Focused 15 was able to build a physics-based risk model that better guides market price changes. In addition, all market lows in the sample occurred near or at risk appetite lows based on this solar model.

I have to say that I am a bit skeptical, but I am intrigued by this body of research. We’ll see a new body of research in decision science looking at how dramatic the impact is.

At the very least, it’s worth considering whether it’s your “instinct” to liquidate stock positions, or just an unexpected solar flare. Or pitching a new and innovative strategy to the investment committee or trying to launch his first fund is not his dull December or January, but his sunny July or August. You may have to postpone.

If that happens, I can claim that I was at the forefront of introducing “PhyFi” to institutional investors, but there is no ring exactly like that.

Christopher M. Schelling is the founder and chief investment officer of 512 Alternatives. 512 Alternatives is a specialist consulting firm helping wealth managers, family offices and small institutions understand and access alternative investments.

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