The Friday the 13th effect: superstitions in behavioural finance

In the world of finance, where data-driven decisions and rational analysis are the norms, it might seem surprising to find that superstitions still play a significant role in market prices. One of the most intriguing examples of this is the "Friday the 13th effect." This phenomenon highlights how even the most experienced investors can be swayed by irrational beliefs, impacting market behaviour in ways that defy traditional financial theories.

The origins of Friday the 13th superstition

Friday the 13th has long been considered an unlucky day in Western culture, though its precise origins remain somewhat unclear. The superstition is thought to arise from a combination of two distinct fears: the fear of the number 13, known as triskaidekaphobia, and the fear of Fridays.

Historically, both Fridays and the number 13 have been associated with bad luck and misfortune. In Christianity, for instance, Jesus was crucified on a Friday, and the Last Supper had 13 attendees, including Judas, the betrayer. These historical and religious associations have contributed to the negative connotations surrounding both the day and the number.

Although the exact roots of this superstition are difficult to pinpoint, the blending of these two fears has resulted in Friday the 13th being viewed as a particularly ominous day. This combination has ensured that the date remains one of caution and unease for many people.

Behavioural finance and superstitions

Behavioural finance examines how psychological influences and biases impact the financial behaviours of investors and financial practitioners. Unlike traditional finance, which assumes that all market participants act rationally, behavioural finance recognises that emotions, cognitive errors, and even superstitions can significantly affect financial decisions.

The Friday the 13th effect in financial markets

Several studies have investigated the impact of Friday the 13th on stock market returns, and offered varying results, but one conclusion. Stock markets are affected by Friday 13th. One notable study by Donald B. Keim and Robert F. Stambaugh in 1984 found that stock returns on Friday the 13th were significantly lower than on other Fridays, hypothesizing that investor behavior on this particular day deviates from the rational expectations of the Efficient Market Hypothesis (EMH).

Conversely, a more recent analysis by Bespoke Investment Group revealed the opposite. This study identified intriguing patterns in the performance of the S&P 500 index, which indicated that on Fridays that fall on the 13th, the average gains for the S&P 500 are four times higher than the historical average daily movement.

While neither evidence is conclusive, it underscores the intricate mechanics of financial markets and highlights the significant impact of human sentiment and psychological factors on price movements.

So, what are the psychological factors at play?

The impact of Friday the 13th on financial markets can be explained through several psychological mechanisms:

1. Confirmation Bias: Superstitious investors might selectively remember instances where Friday the 13th coincided with negative outcomes, reinforcing their belief in the day's unluckiness. This heightened risk aversion could lead to more conservative or different than usual trading behaviors, such as selling off riskier assets or refraining from making significant investment decisions.
2. Loss Aversion: According to prospect theory, investors are more sensitive to losses than to gains. The fear of potential losses on an unlucky day might lead them to avoid trading or to sell off risky assets.
3. Herd Behavior: On Friday the 13th, investors might follow the actions of others rather than their own independent analysis. If a significant number of investors believe in the superstition and start selling off assets, others might follow suit, leading to a self-fulfilling prophecy.
4. Media Influence: Media coverage can amplify the superstition surrounding Friday the 13th. Sensational headlines and stories about the day's supposed unluckiness can influence investor sentiment, leading to more cautious or negative trading behaviors.

Implications for investors

Understanding behavioural finance is crucial for both individual investors and financial professionals. Here are a few key takeaways:

1. Awareness: Being aware of how superstitions can influence market behavior can help investors recognise and mitigate their own biases. By acknowledging that these irrational beliefs can affect decision-making, investors can strive to make more rational choices. This awareness enables clients to be more conscious of the cognitive biases influencing their decisions.
2. Avoid Market Timing: Predicting short-term market movements is inherently challenging and often results in suboptimal decisions. Instead, adopt a long-term investment perspective and remain invested throughout market fluctuations.
3. Importance of Emotional Regulation: Emotional responses to market fluctuations can lead to impulsive decisions that may harm investment performance. In order to overcome this, having strategies to manage emotions, such as setting long-term goals, maintaining a diversified portfolio, and avoiding the temptation to react to short-term market movements are inherently important.

Conclusion

The ‘Friday the 13th effect’ serves as a fascinating example of how superstitions can infiltrate even the most rational and data-driven environments. While traditional finance theories emphasise rational decision-making, behavioural finance reminds us that human psychology, with all its quirks and biases, plays a critical role in financial markets. By understanding and acknowledging these influences, investors can better navigate the complexities of the market and make more informed decisions regarding their investment habits.

So, the next time Friday the 13th comes around, remember that while it might be just another day on the calendar, its psychological impact on the market is a powerful reminder of the human element in finance.

References

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3424267 

https://edition.cnn.com/style/article/why-friday-13-unlucky-explained/index.html 

https://www.researchgate.net/publication/228258854_Friday_the_Thirteenth_and_the_Stock_Market 

https://www.mdpi.com/2227-9091/11/4/72 

https://beiinghuman.com/behavioral-finance-exploring-the-intersection-of-psychology-and-finance/