With the help of 2,530 participants, the illuminating research brought to light several insights into the impact that luminance can have on “the quality and consistency of our financial decision-making”.
It has previously been established that luminance, a measure of the amount of light that falls on the earth’s surface, can affect general behaviour due to connections between the retina and certain sections of the brain.
However, when examining financial behaviour specifically, the study shed light on the fact that this effect extends to our money decisions, along with how we perceive risk.
How does luminance affect our spending?
The study found that:
- In a gloomy turn of events, days with higher light intensity saw participants make worse and less consistent decisions
- Higher luminance resulted in a higher propensity for avoiding known risks
- When offered the choice of a guaranteed $5 reward, and a 50% chance of a $20 reward, participants were more likely to choose the former option
- However, higher luminance also increased the participants’ tolerance for unknown risks
- When given the same choice, but with an unknown chance of receiving the $20 reward, participants were more likely to choose the latter option
The findings are based on behavioural data obtained by asking participants to make 40 different hypothetical monetary decisions.
Participants were asked to choose between:
- A certain payout of $5
- A lottery option with the possibility of receiving nothing
- A cash amount between $5 and $125
The lottery option and cash amount varied throughout each of the 40 situations, and the responses received were compared against luminance data from a weather station in the area.
Do the findings have any ramifications?
According to University of Sydney Associate Professor and corresponding author of the report Agnieszka Tymula, the effects are “not of an enormous magnitude,” but that doesn’t make them insignificant.
“Nevertheless they are consistent, significant, and strong enough to be expected to have significant effects on financial markets,” she said.
Risk aversion is affected by more than light
While it’s handy to be aware of the fact that the weather could potentially make you more or less tolerant of risk, previous studies from Associate Professor Tymula have revealed that other factors can make you more or less risk averse.
In a University of Sydney publication from 2016, Associate Professor Tymula said her prior work had established that:
- Older individuals are more averse to risk and ambiguity than their mid-life and young counterparts, making 40% less money on average than the latter two demographics when participating in exercises similar to the one detailed earlier.
- Contrary to popular belief, adolescents are not especially prone to risk-taking behaviour.
- In situations where the risk in question was known, adolescents proved to be as risk averse as older individuals, and significantly more risk averse than middle-aged individuals.
- However, in situations where the risk was unknown, adolescents tended to be more risk tolerant.
Association Professor Tymula said that in situations where the risk was unknown, adolescents tended to “behave as though the odds are skewed towards positive outcomes”.
She noted that the findings could be useful in limiting risky behaviour undertaken by adolescents, especially in light of the fact that the mortality rate for adolescents is twice as high as that of younger children.