Split Personalities? Behavioral Effects of Temperature on Financial Decision-making

Abstract

How do environmental factors affect financial decision-making? Using plausibly exogenous variation in exposure to fluctuations in temperature over a sample of individuals between 2004 and 2018 across 28 European countries and Israel, we estimate the causal effect of a marginal change in temperature on financial investments and its interaction with individual personality characteristics. We find that a 10\% increase in temperature is associated with a 0.1 percentage point (pp) rise in the probability that an optimist invests in bonds, a 0.12 pp decline in the probability for stocks, and a 0.11 pp rise in mutual funds. However, among pessimists, we find null effects. We find similar results when we focus on the intensive margin of investment as well. Our results are identified of within-person variation after controlling for all shocks that are common within a country and year, thereby purging variation in time-varying country policies and macroeconomic conditions. These results are unique to optimists versus pessimists, rather than general happiness or interest. Furthermore, the variation in optimism is largely driven by attitudes about risk, rather than attitudes about trust. Our results are consistent with behavioral finance models where expectations moderate the transmission of shocks onto financial decision-making.