Stories | June 20, 2012

Did you know ...share markets often fall after a big sports loss

On average, a country’s share market drops by 0.5% the day after its national team loses a World Cup knockout game. This finding was made by academics Alex Edmans, Diego Garcia and Øyvind Norli. On the face of it, this is a very strange fact.

Rationally, the result of a football match shouldn’t affect a national stock market. For instance, if France loses a big football match, it’s hard to see how that could damage a French company like the luxury group LVMH. And yet a defeat in football does cause a country’s stocks to fall (as this full academic paper shows). It’s an example of investors behaving irrationally.

Economists used to think that people mostly acted rationally when it came to money. But in recent years a growing tribe of behavioural economists has shown this isn’t so. Our emotions – sometimes triggered by something as arbitrary as a football defeat – often prompt us to take irrational financial decisions. A good example is the so-called “endowment effect”: our irrational tendency to overvalue things simply because we own them.

For instance, the endowment effect tends to make home owners feel their house is worth more than it really is. That irrational judgment can cause them a lot of pain. Often, it stops them moving house because they refuse to accept the prices they are offered.

Countering the irrational
We are all capable of making irrational, emotion-driven financial decisions. But there are ways to counter this tendency. For instance, if you suspect you are in the grip of the endowment effect, ask yourself: “How much would this item be worth to me if I didn’t already own it?”

Peter Aceto, chief executive officer of ING Direct Canada, recommended using a “7 second rule” for important financial decisions. He writes: "Basically, when you are considering a purchase, pause for seven seconds while asking yourself, 'Do I really need to buy this thing?'” The best way to counter our irrational impulses is first of all to recognise them, whether it’s a reaction to a football match or to something else.

Simon Kuper

Sports and economics author