Daylight-Saving Time Changes, Anxiety, and Investing

During the first weekend of November, people in most parts of the United States and Canada will turn their clocks back an hour, returning to Standard Time from Daylight Saving Time. For most individuals, the gain or loss of an hour on the clock typically translates immediately into the gain or loss of an hour of sleep. Psychologists refer to the fallout from such disruptions as “sleep desynchronosis,” with the symptoms of the changed sleep habits closely resembling jet lag.

This phenomenon can have significant consequences. For instance, psychologists have noticed that whenever we shift the clocks to or from daylight-saving time, car accident rates tend to rise, likely due to the cognitive changes that accompany disrupted sleep habits. Perhaps surprisingly, the phenomenon is observed whether people are gaining or losing an hour of sleep.

Several large-scale disasters have been associated with lack of sleep or disrupted sleep due to shift work, including the Exxon Valdez oil spill, the space shuttle Challenger explosion, the Three Mile Island near-meltdown, and the Chernobyl nuclear accident. My colleagues and I have noticed that the adverse effects of daylight-saving time changes can also spill over into financial markets, seemingly through increased anxiety that accompanies altered sleep patterns.

In the language of financial economists, an increase in anxiety translates into greater reluctance to bear financial risk (or greater risk aversion). If investors wake up on the Monday following the time change feeling more anxious (and more risk averse) than usual, they may be less willing to buy risky stock and could even consider selling the stocks they already own. With many investors simultaneously experiencing such a shift in their sentiment, the result is often a drop in stock markets on the Monday following the time change.

Of course, financial markets are impacted by many different factors (not least important of which is fundamental economic news), so naturally the stock market could go up or down following any given daylight-saving time change. What my co-authors (Mark Kamstra and Maurice Levi) and I showed is that on average markets tend to decline following the time change. (See “Losing Sleep at the Market: The Daylight Saving Anomaly” American Economic Review, 90(4): 1005–1011.)

In that study, we considered stock market returns from four countries, some of which change the clocks on different dates relative to the U.S. and Canada. We found the market downturn associated with daylight-saving time changes amounted to a single-day loss of $31 billion in U.S. markets, on average.

The finding does not imply ordinary investors should do anything drastic in preparation for the time change. I am definitely not counselling anyone to time their purchase or sale of securities in accordance with the time change.

In fact, experience tells us the best way to navigate through our emotions in the context of investing is to avoid making important decisions whenever feelings come into play. Folks who make investing decisions during emotional times often end up suffering dramatic financial consequences.

Think of all the people who panicked during the recent financial crisis, selling just when their fears—and markets—were at their worst. Many of them ended up liquidating their assets at steeply discounted prices. Had they just sat tight and stuck to a buy-and-hold approach, they would eventually have noticed their stocks resuming their previous values.

At the best of times, people can be forgiven for feeling a sense of anxiety when it comes to investing. Emotions can ride even higher than usual under some conditions, including times of sleep disruption such as those associated with daylight-saving time changes. By remaining calm and avoiding impulsive, emotion-driven investment decisions, there is no need to lose sleep over the market.