(Bloomberg) -- As seasons change, so do the habits of fund investors.

When it’s spring and the days get longer, risk appetites grow and cash flows to equities, according to a new study. As winter approaches, safer alternatives like the money market come into favor. Seasonal depression is to blame, the researchers said. A reduction in sunlight worsens people’s moods.

More is at work in the market than robots battling over earnings and valuation, according to the behavioral branch of analysis from which the study springs. The updated findings, from the paper “Seasonal Asset Allocation: Evidence from Mutual Fund Flows” to run in the Journal of Financial and Quantitative Analysis, surprised its own authors.

“I initially thought that depressed people would throw all caution to the wind and do risky things just to get back into a decent frame of mind,” said Maurice Levi, the University of British Columbia professor who coauthored the report. “But they actually tend to withdraw. It’s enough to affect the markets.”

Results like these may interest the mutual fund industry, which spends more than $500 million a year on advertising, the authors said. More research may show that managers anticipating the patterns affect returns in stocks and bonds, they added.


The idea that emotions can dictate investment habits is nothing new. Benjamin Graham, the father of value investing, once said, “Individuals who cannot master their emotions are ill-suited to profit from the investment process.”

Neuroscientists have been dabbling in behavioral finance since the start of the decade. Neuroeconomics, which attempts to explain how people manage risk and why they make irrational decisions, has been offered as a doctoral program at the University of Zurich since 2010.

“The nature of markets is that sentiment will always create price distortions,” said Hersh Shefrin, a professor of behavioral finance at Santa Clara University who knows the authors. “None of us like risk, and it’s perfectly rational to think that risk aversion is time-variant. I’m quite persuaded that this is a real phenomenon.”

The study examined monthly fund flows from 1985 to 2006. It concluded that seasons had a statistically significant influence on which asset classes got the most through the year.

Levi, along with York University professor Mark Kamstra, University of Toronto associate professor Lisa Kramer and University of Maryland professor Russ Wermers, quantified monthly flows into five fund categories with varying risk profiles.


Money market funds were treated as the safest and equities the riskiest. They found net flows into U.S. stocks were below average from September through December and highest from March to June. The opposite was true in money markets, which saw greater inflows in the autumn and subpar inflows for spring.

The patterns reduce net flows to equity funds by about $13 billion as days shorten, the authors estimated. They boost flows to safer products by as much as $4 billion in September.

“We find strong evidence that this seasonality is correlated with the timing of seasonal variation in risk aversion,” the authors wrote. The consequences are “economically large, representing tens of billions of dollars,” they said.

The study was designed to limit other influences such as the timing of year-end bonuses, taxes, and patterns of mutual fund advertising. Other factors considered were the timing of capital gains and whether investors were chasing certain returns. The patterns held up in Australia, where summer starts in December.

“When you make bets, you have to understand that you’re putting yourself at the mercy of other investors’ irrationality or psychology,” Shefrin said. “We don’t have perfect theoretical or empirical tools, so we’re at a stage where we’re just trying to do our best to make sense of things. This is the tip of the iceberg.”

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