As you read these lines, many of you will be at the end of a stressful and exhausting workweek and be glad it’s almost over. But while you are approaching the weekend, you may want to refrain from making investments, because they may be less successful than investments you make on other days of the week.
The behavioural finance literature is full of investigations of calendar anomalies most of which you shouldn’t take seriously to begin with. But I recently came across a new calendar anomaly that I found really strange. Xinlong Li and Avni Shah examined the peer-to-peer loan market where retail investors can lend money to retail borrowers. As always in the loan market, the risks differ from loan to loan and higher risks require higher interest rates to attract enough lenders.
Now take a look at the activity of lenders during a workweek. Money lent on Fridays went to riskier loans with higher interest rates.
Average investment interest rate during the week
Source: Li and Shah (2020).
Similarly, loans made on the last day of the month were riskier than during other days of the month.
Average investment interest rate during the days of a month
Source: Li and Shah (2020).
It’s hard for me to wrap my mind around this one, but it seems that on the last day of the week we are more enthusiastic and in a better mood, and being in a better mood increases our risk tolerance.
Of course, if you look at the numbers in the charts above, you will realise the differences are miniscule, so this is another calendar anomaly that probably can’t be exploited in an investment strategy. But it hints at something else. The lenders who invested in riskier loans on Fridays or at the end of the month experienced lower returns afterward because their increased risk taking led to more defaults and destroyed some of their performance. And this is something we all need to be aware of: Don’t make an investment when you are in a good mood… or in a bad mood (because then you are likely to take too little risk). Or in any mood at all. Just have an investment plan and systematically invest some of your savings at regular intervals and you will do just fine.
Lovely article
Could this be due to quotas that have to be met on a weekly/monthly basis?
If there are X loans that need to be approved each Y units of time, the loans at the tail end may be objectively worse as they would not have been approved unless the quota numbers were to be made.