Rain or shine: Happiness and risk-taking

Highlights

• Sunshine has a significant impact on happiness using longitudinal data from Germany and the Netherlands.

• Instrumenting happiness with sunshine, happy people are found to be more risk-averse.

• This instrumental variable approach gives more clue about causation.

• Happy people are more concerned about the future than the present.

• Findings have important implications for future research.

Abstract

In this paper, we focus on the effects of weather, such as sunshine, as an exogenous shifter of happiness using happiness data at the individual level, and estimate sunshine as a predictor of happiness. Then we relate the predicted happiness to risk-taking. By doing so, we estimate a relationship, stronger than a simple correlation, between happiness and risky behavior. Weather changes, and sunshine in particular, have substantial influences on personal happiness. However, unexpected weather changes appear to be more important than expected changes for happiness. We include several risk measures such as subjective risk-taking and financial assets in our analysis. Happier people appear to be more risk-averse in general and more specifically in financial decisions, and choose accordingly safer investments. This might be explained by the fact that happy people take more time for making decisions and have more self-control. In addition, predicted happiness affects expectations about longevity and inflation. Happy people expect to live longer and accordingly seem more concerned about the future than the present, and expect less inflation.

Introduction

The empirical research to date has mixed evidence on the relationship between the optimism of people in positive affective states and risk-taking. Therefore, the first contribution of this paper is to examine the causal effect of self-reported happiness (life satisfaction) on risky behavior using survey data. The stated objective is therefore to establish a relationship stronger than a simple correlation, which is always a difficult task, given the usual omitted variables and reverse causality problems which applied researchers face.

The literature focusing on the influence of weather on financial variables is providing mixed results.¹ As a second contribution, we focus on the effects of weather, sunshine, as an exogenous shifter of happiness using happiness data at the person level, and estimate sunshine as a predictor of happiness. We then relate predicted happiness to risk-taking. Establishing this relationship could explain the correlation between weather and financial variables found in the finance literature, and could also help to determine the extent to which the findings from this research should be incorporated into policy analysis.

Further to this mixed evidence discussed above, the channels through which weather might affect financial variables are also unknown. Therefore, we examine the potential channels to explain our findings such us discount rates and self-control which is the third contribution of this paper. Using an instrumental variables approach, we establish a relationship going from happiness to risk-taking behavior. In order to establish this relationship, we use exogenous regional sunshine as an instrument for current personal happiness. Measures of sunshine are accessed through the European Climate Assessment Dataset (ECAD). Our personal survey data come from the Dutch Household Survey (DHS), which is a panel of 4500 persons covering the period 1993–2006, and the German Socio-Economic Panel (GSOEP), which is a panel of 21,000 persons surveyed from 1984 to 2006. The surveys provide self-reported measures of well-being, such as responses to questions about how happy and satisfied individual respondents are with their lives, as well as, very detailed information on wealth and different measures of risky behavior.

Our empirical findings suggest that weather changes, and sunshine in particular, have substantial influences on personal happiness. However, unexpected weather changes appear to be more important than expected changes of weather for happiness. The paper considers risk measures such as subjective risk-taking and financial assets. Happier people appear to be more risk-averse both in financial decisions and in general life decisions, and choose accordingly safer investments. Happy people are more likely to have life insurance, savings accounts, and operating assets, but are less likely to own stocks and bonds. Happy people prefer investing less in shares, because they find them too risky.

Happy people take more time to make decisions and have more self-control. In addition, happiness affects subjective expectations about longevity and inflation. Happy people expect to live longer and accordingly seem more concerned about the future than the present, and expect less inflation. Happier people are more forward looking than less happy people. Therefore, one could expect that people who expect to live longer presumably have stronger incentives to save, which is confirmed by our results for the savings accounts.

The remainder of the paper is organized as follows. Section 2 provides an overview of the related economic literature on correlates of well-being and the impact of well-being on risk-taking behavior. Section 3 summarizes the data, and Section 4 provides the details about the empirical framework and the identification strategy. Section 5 presents the empirical results and Section 6 concludes.