ABSTRACT
Environmental factors such as the weather, air pollution, and terrorist attacks can have adverse effects on health, cognition, and mood that then influence financial decisions. For example, sunshine can lead to a positive mood that causes the stock market to rise and investors to take more risk and to be more optimistic. Conversely, a negative mood caused by seasonal affective disorder (SAD) and the lack of daylight causes less risk taking, more pessimistic views, lower stock returns, lower volatility, and higher bid-ask spreads. Pollution impacts people’s health and mood and subsequently has a significant impact on the stock market and is associated with lower stock returns, higher volatility, and poor financial decision making. Allergens like pollen also cause cognition problems for investors. Finally, natural disasters and terrorist attacks cause investors to be more risk averse in their behavior.
