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

The fact that environmental factors have a broader effect on financial decision-making has been lengthily explored. In the light of the fact though that people differ in several respects, what is yet to be explored is how personality traits might mediate these effects? Using plausibly exogenous variation of individuals’ exposure to changes in national temperature between 2004 and 2018 across 29 countries, we estimate the causal effect of a marginal change in temperature on financial investments and its interaction with the trait of optimism/pessimism. A 10% increase in temperature is associated with a 0.03 percentage point (pp) rise in the probability that an optimist invests in bonds and a 0.024 pp decline in the probability for investment in stocks. However, among pessimists, we find null effects. Focusing on the intensive margin of investment produces similar results. Providing evidence for the fact that personality traits lead to a differential processing of the same stimuli and ultimately affect economic decisions is crucial in an era of inherent volatility