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- What type of music people listen to is reflected in stock markets, Finance professor Alex Edmans says.
- There is a correlation between the positivity of music and returns, volatility, fund flows and even government bonds.
- This is because emotions drive decision making and are reflected in music choices, Edmans argues.
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What type of songs you listen to could be reflected in how your stock portfolio performs, as there is evidence of a correlation between the positivity of the music investors listen to and returns, according to Alex Edmans, who is professor of finance at London Business School.
Traditional economic belief is that fundamentals impact markets – but humans aren’t automated robots, Edmans told Insider in an interview. Their mood impacts their decision making, and this extends too to their investment decisions that ultimately impact markets.
The base assumption for Edmans’ research is that people’s happiness levels are often reflected in what songs they listen to and therefore music choices and market developments can be linked to one another.
“In weeks in which the citizens of a country are listening to more happy music, the market goes up and in weeks in which they are listening to unhappy music the market goes down. So the music you’re listening to is linked to stock returns,” he explained to Insider in an interview.
The research is based on data from Spotify, one of the biggest music streaming platforms. It tracks what songs are being played in different countries, as well as assigning them a positivity or negativity score. The researchers used this as one metric to measure the mood of populations before linking it to market events.
And it is not just stock market returns that can be correlated with music choices. Volatility for example is also mirrored in music – the more people play extremely positive or extremely negative songs, the more market volatility rises, Edmans’ research found.
When it comes to net equity fund flows, more positive music choices can be associated with higher inflows. And looking at government bonds, an increase in negative, or sad songs, being played can be correlated with investors buying into bonds. This is in line with the idea of investors moving into safer assets during periods of low market expectations, he said.
The research could have real-life implications for investors as it provides evidence for a link between someone’s mood and their investment choices, Edmans said.
“By showing that emotions actually drive stock returns, that’s just highlighting the importance of traders just being very aware and careful of their emotions and not to trade, perhaps, when they’re in an extremely good mood or an extremely bad mood,” he said.
“One thing that a lot of other research actually suggests is that when people trade, the average trade loses money. [… ] And what we’re suggesting in this paper is one of the reasons might be that these trades are driven by emotions rather than fundamentals.”
This does not just apply to professional investors – retail crypto traders for example are just as driven by emotions, Edmans believes. And this can make their investments riskier and losses more likely, he said.
Whether you are a professional or retail investor, caution around emotion is therefore key, he said.
“What we’re saying is just hold your horses sometimes before making a trading decision and to make sure that what really is driving it is analysis rather than emotion,” Edmans said.
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