The World Cup, a global competition of the football (soccer in US), has long become the
international festivity. Countries all over the world celebrate and get
participated in this big event. The excitement of World Cup creates the
euphoria and the emotion throughout the whole world both the thrill of winning
a victory and getting into the risk of a defeat. This year marks another World
Cup being held in Brazil. The three lions-England, Spain, and Portuguese have
already kicked out of the game.
Bill Wilson, BBC
News reporter reported on June 23, a compelling news with a headline “World Cup
2014: The Real Cost of Losing?” Wilson reported the wide impact of World Cup
according to Alex Edmand, a finance professor at the London Business School. He
revealed his findings on his research about the impact of emotions created by
the World Cup in the stock market. There is such an “emotional hand” drivng the
investor to react in the stock market irrationally as if the analogy of Adam’s
Smith-invisible hand that acts in the market creating supply and demand theory.
One of an
interesting article about World Cup 2014 did show up in the newsletter of
London School of Business and Finance (LSBF) written by Alex Edmand. The
article in the newsletter was originally cited from www.cityam.com.
The article talked about the World Cup fever putting the loss of England into a
swing of billion pounds in the stock market. In his article, he stated that it
is extremely difficult to match the perspective of the efficient market and the
behavioral finance. The efficient market holds the state of having the rational
investors and argues that the price of stock incorporates all relevant
information (available and fully relevant information) assuming that the price
ends up theoretically correct fundamental value. Meanwhile, the behavioral
finance argues that stock price is not solely defined by the fundamental value
but also the emotions. In late 1990s, internet companies have become highly
expensive. According to Financial Behavior, it was not because of the prospect
of the internet companies but the irrational investor. On the other hand, it
could be that the internet stock price was fundamentally correct but then a
crash happened as bad news unexpectedly spread out.
The new term
“irrational exuberant” was firstly pointed out by Alan Greenspan-The President
of Fed (Federal Reserve-US central bank) at that time. This term was later
popularized by the writing of Shiller through his book entitled Irrational Exuberance.
The Concept of Efficient Market
“An
efficient market (EM) is defined as one in which the prices of all securities
quickly and fully reflect all available relevant information” (Jones, 2010 p.
300). In short, there are two main components in the concept of efficient
market, i.e. relevant information and fully reflect available information.
Hence, the market price of the securities should incorporate all relevant
information and on the other hand, it should also reflect available information
for the information is important to the investors to create decisions whether
to buy or sell as well as to measure the expected return in correspond to the
risk level.
Jogiyanto
(2013:548) classified efficient market into two categories, informationally efficient market and decisionally efficient market. He
further mentioned that informationally efficient market consists of three types
of form: weak form, semi-strong form, and strong form. First, weak form is a
market which the price of the securities fully reflect past information. Second,
semi-strong form is a market which the the price of securities fully reflect
all published information. Third, strong form is a market which the price of
securities all kinds of information includes the private information. However,
the main difference between informationally efficient market and decisionally
efficient market is that informationally efficient market only consider the availability
of information. Meanwhile, decisionally efficient market considers two factors;
both the availability of information and the sophisticated behavior of
investor.
Behavioral Finance
People
are sometimes irrational due to some reasons especially the psychological
condition. Bernstein in Jones (2010:318) noted that one finds “repeated
patterns of irrationality, inconsistency, and incompetence in the ways human
beings arrive at decisions and choices when faced with uncertainty.” Emotions
and the psychology of the investors have found to be the causes in the biases
that affect stock prices and markets. In
processing information on the stock market, investors often make systematic
mistakes. Investors are motivated by various irrational forces. Therefore the
irrational judgment mistaken by these investors can give benefit to the other
investors who recognize this irrationality.
Accoding
to DeBondt and Thaler (1985) in Jones (2010:319), people overreact to unexpected
and dramatic news events saying that the consequence of overreact is that
“loser” portfolios outperform the market after their formation which indicates
irrational behavior of the investor (overreaction).
The
Efficient Market Hypothesis (EMH) believes that markets are informationally
efficient. However, according to behavioral finance, in some circumstances
markets may be informationally inefficient.
Edmands (2014) argued that the
previous study and research observed the impact of weather to the stock market.
Unfortunately, weather has the boundaries, the geography and climate that
depends on the location. Therefore, the weather in one place could be widely
different from weather in other places. The effects of weather to stock markets
have also been questionable as they may create different impacts to one
another, specifically the personal factor or the emotional impact of weather
couldn’t be controlled creating biases of weather’s impacts to stock market.
Psychological research found that
individual mood is affected
by weather and daylight savings changes respectively, Saunders (American
Economic Review 83, 1337–45, 1993) and Kamstra et al. (American Economic Review
90, 1005– 11, 2000) stock prices are systematically related to these
economically- neutral events. Another literature found a similarly-strong
relationship between sporting team success and fan self-esteem, a finding which
raises the possibility that stock prices also respond systematically to sports
results (Boyle, G., & Walter,
B., 2003).
Previous
study conducted by Lucey and Dowling (2005) studied about the role of emotions
in the process of decision making and equity pricing by the investors.
Investors appear to allow their mood state at the time of making an investment
decision to influence their judgment. While this is an efficient
decision-making tool and is consistent the general knowledge on how people
create decision, it may bias the investors towards irrelevant mood states that
could influence their judgment.
It
was shown that investors can sometimes invest in an equity based on whether
they like or dislike a company… Given the strength of the theoretical support
for investors investing in a manner consistent with their feelings, this
research area deserves further investi- gation. Especially, as many of the findings
in the area are inconsistent with existing theories of how investors should
make investment decisions. Previous studies in this area, especially in the
area of environmentally induced mood effects on equity pricing, have been
mainly empirical, with (arguably) limited theoretical foundations (Lucey &
Dowling, 2005)
Edmand (2014) found a greater
impact of sport to the weather in affecting people. One of the evidence was
found in the loss of England from Argentina in World Cup 1998 creating more
heart attacks in the following days. He did an investigation over 1,100
international football matches and stock returns in 39 countries in Sports
Sentiment and Stock Returns. He found that being eliminated from the World Cup
creates a national market fall by 0.5 percent on the next day (cateris
paribus). As of applying in the UK stock
market, this fall creates 10 billion pounds wiped off the market in a single day
as England loses.
According
to Edmand (2014), the effect of sport sentiment is higher in the World Cup-an
international level sport than a national/regional match such as European
League. It is because World Cup relates a bigger scope and creates greater
tension which correlate across countries. It is also stronger in countries
which have the favor of football such as England, France, Germany, Spain,
Italy, Argentina, and Brazil. This phenomenon applied similarly in other areas
of sport, such as cricket, rugby, and basketball. The decline in the market are
caused by the economic effects of losses, for instance the defeat causes the
reduced number of sales in the merchandise and the emotion of a loss creating
negative emotion causing lower productivity of the workers.
The
loss that creates elimination causes strong effect to the negative emotion of
the fans. However, Edmand (2014) there has not been any finding on the effect
of a winning a match. One of the reason proposed was that the fans are
naturally optimistic that their beloved teams are about to win. When the team
finally wins, it perfectly meets the expectation of the fans. Therefore, they
already set with this mindset creating not much effect. However, if the team
lose, the fans get depressed with the fact that doesn’t meet their initial expectation.
This creates highly negative attribution.
Empirical
evidence found in the study of Boidoa and Fasanob (2007) in Italy that soccer
data, relative to Italian teams, shows that the average price/return ratio
following wins is higher than average prices/return ratio following
unsuccessful matches. Examining the impact of lost and tied matches, both
researchers found that Italian investors dislike matches ending in ties.
Meanwhile, Boyle and Walter (2003) investigated
the impacts of national sport event in New Zealand, it is found that
stock return behavior is independent of the success of the premier national
sports team.
The
World Cup 2014 has been reviewed by Alex Edmand. It was evident that following
the loss of England to Italy, the stock market fell by 0.34 percent in UK while
the rest of world market remained stable. On the other hand, Spain lost 5-1 to
Netherland creating a fall by 1 percent the next day in the Spain stock market.
In conclusion, emotions
and the psychology of the investors have found to be the causes in the biases
that affect stock prices and markets. In
processing information on the stock market, investors often make systematic
mistakes. Investors are motivated by various irrational forces. Therefore the
irrational judgment mistaken by these investors can give benefit to the other
investors who recognize this irrationality.
According
to Edmand (2014), the effect of sport sentiment is higher in the World Cup-an
international level sport than a national/regional match such as European
League. The loss that creates elimination causes strong effect to the negative
emotion of the fans. However, there has not been any finding on the effect of a
winning a match. One of the reason proposed was that the fans are naturally
optimistic that their beloved teams are about to win. When the team finally
wins, it perfectly meets the expectation of the fans. Therefore, they already
set with this mindset creating not much effect. However, if the team lose, the
fans get depressed with the fact that doesn’t meet their initial expectation.
This creates highly negative attribution.
Reference
Boyle, G., & Walter, B. (2003). Reflected
glory and failure: International sporting success and the stock market. Applied Financial Economics, 13(3), 225-235.
Boidoa, C., & Fasanob, A. (2007). Football
and mood in Italian stock exchange. Review of Financial Studies, 14, 1-27.
Edmand, A. (2014). World
Cup fever: Why an England loss will wipe billions off the stock market | City
A.M.. [online] Cityam.com. Available at:
http://www.cityam.com/article/1402423069/world-cup-fever-why-england-loss-will-wipe-billions-stock-market
[Accessed 20 Jun. 2014].
Jogiyanto, H. (2013). Teori Portofolio dan Analisis Investasi. Yogyakarta: BPFE
Jones, C. P. (2010). Investments Principles and Concepts. New York: John Wiley &
Sons, Inc., Eleventh Edition.
Lucey, B. M., & Dowling, M. (2005). The
Role of Feelings in Investor Decision‐Making. Journal
of economic surveys, 19(2),
211-237.
Wilson, B. (2014). World
Cup 2014: The real cost of losing?. [online] BBC News. Available at:
http://www.bbc.com/news/business-27976865 [Accessed 20 Jun. 2014].
***
Nur Isnaini Masyithoh
Accounting Student at Faculty of Economics and Business
Universitas Gadjah Mada
Nur Isnaini Masyithoh
Accounting Student at Faculty of Economics and Business
Universitas Gadjah Mada
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