The investment success of night owls

This Sunday, we in the UK turn our clocks one hour ahead once more as we spring forward to summer time. For me, this is a highly unwelcome event because every year, it robs me of an hour of sleep. I admit to being an extreme night owl. My natural rhythm is to stay up until 2am or 3am and then sleep until 10am the next morning. Alas, the worst part of my job is that it forces me to get up at 5am to be in the office and work at 7am each day. I find that absolutely cruel and I thank the pandemic for sparing me the one-hour commute into the office each day, so I can get another hour of sleep while working from home.

But while I have my problems in the morning, I could console myself with the knowledge that we night owls are more intelligent than larks and other early birds. It is self-evident for us night owls that we are more intelligent than other people, though, somehow larks never seemed to understand that, so there had to be a scientific study on the difference in intelligence between night owls and early birds. Though, reading that study, I think it might just be another example of publication bias.

In any case, when sociologists can publish a study on night owls and their intelligence, economists can’t be far behind to measure their investment behaviour. And lo and behold, we night owls are also the better investors, it seems. Grace Lepone and Zhini Yang used the trading data of c.39,000 Australian retail investors between 2004 and 2011 to measure when these investors traded, and in what stocks they traded.

To figure out if an investor was an early bird or a night owl, they used clustering analysis to check if orders were mostly given in the morning or afternoon/evening. The chart below shows the average trading volume by these retail investors during the day. Note, that these are retail investors, so they are presumably not timing their trades to match liquidity in the market like professional fund managers and traders would. Note also, that the chart shows when the trades were entered by the investors, not when they were executed by the bank.

Average trading volume of retail investors during the day

Source: Lepone and Yang (2020).

While the study couldn’t measure the performance of night owls vs. larks directly, it at least showed that night owls traded less frequently. We know that retail investors who trade more frequently tend to have much worse performance so the higher degree of activity puts early birds at a disadvantage. But then there is the other result. Early birds tended to invest significantly more in lottery stocks, that is stocks that have negative skewness and above-average valuations. These stocks tend to have a negative expected return and are more likely to produce losses than gains, but in exceptional circumstances, they offer a large positive return (hence the name lottery stocks). Investing in these stocks is like “investing” in the lottery. It’s going to lose you money on average.

Both of these biases indicate that night owls should on average have better performance than early birds in the stock market. But then again, we night owls knew that all along, anyway.

PS: I realise that these posts are sent out at a time of day when larks are already hard at work while many night owls may still be asleep in bed. So, my apologies to all larks if I have offended you.