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

Do environmental factors affect financial decision-making and how might personality traits mediate these effects? Using plausibly exogenous variation in individuals' exposure to within-country fluctuations in temperature between 2004 and 2018 across 28 European countries and Israel, we estimate the causal effect of a marginal change in temperature on financial investments and its interaction with individual personality characteristics. We find that a 10% increase in temperature is associated with a 0.1 percentage point (pp) rise in the probability that an optimist invests in bonds and a 0.12 pp decline in the probability for stocks. However, among pessimists, we find null effects. We find similar results when we focus on the intensive margin of investment as well. We explain the mechanism behind these results with a stylized model where optimists are involved in more cognitively-demanding activities and sensitive to external stimuli. Our results are consistent with behavioral finance models where expectations moderate the transmission of shocks onto financial decision-making.