Don’t bet on Friday: Research shows financial risk-taking rises at the end of a work week, without a payoff
image: Avni Shah is an Associate Professor of Marketing at the University of Toronto Scarborough and the University's Rotman School of Management. She is the Academic Director, Creative Destruction Lab - Toronto. Using field and laboratory data, she investigates how payment influences consumer decision-making and consumer well-being particularly in financial and health contexts. Her research has covered a broad range of topics such as looking at how paying with different forms of payment influence purchase behavior and how paying a surcharge on unhealthy food items influences unhealthy food consumption. Her work has been published in the Journal of Consumer Research, Journal of Marketing Research, and Psychological Science.
Credit: Rotman School of Management
Toronto - The ancient Roman leader Julius Caesar, in the hands of Shakespeare, was warned to “beware the Ides of March.” But 21st century data shows it’s the end of the work week, the month and year that financial investors should treat carefully.
New research shows those end-of-period times lead to optimism. Feeling optimistic can spur investors to take more risks than they normally would, though with sub-optimal returns.
Previous research has shown that “new periods serve to disconnect individuals from their past selves and offer a ‘fresh start,’” write researchers Avni Shah, an associate professor of marketing at the University of Toronto Scarborough who is cross-appointed to the University’s Rotman School of Management, and Xinlong Li of Singapore’s Nanyang Technological University, who is a graduate of the Rotman PhD program. “Our results suggest that end-of-period landmarks may be important as well, affecting even consequential risk decisions,” says Prof. Shah.
Using Prosper, a popular U.S. peer-to-peer online lending platform, the researchers looked at three years of data between November 2005 and mid-October 2008, covering more than five million investment decisions by the platform’s individual lenders.
During the study period, borrowers could request unsecured loans between $2,000 and $25,000. They also set their maximum acceptable interest rate. Lenders bid on the loan requests, with access to the borrower’s financial history. However, borrowers with higher maximum interest rates were likelier to default, data shows, making bids on their loan requests riskier although also more profitable if borrowers fulfilled their repayments.
The researchers found that lending bids made on Fridays were associated with higher maximum interest rates compared to bids on other days. But it wasn’t just Fridays. Bids on Wednesdays and Thursdays before public holidays, marking the end of the work week, such as Thanksgiving, were also associated with higher maximum interest rates compared to other Wednesdays or Thursdays. A similar effect was found on the last days of the month, regardless of the day of the week that it fell on. And the biggest risk-taking that showed up was at the end of the year on December 31 with the highest maximum interest rates compared to final days of the work week or month.
To examine what was driving the behavior, the researchers set up several follow-up laboratory experiments. Participants indicated they were more optimistic about their financial risk-taking chances when they were primed to think about Fridays or the end of the month over other days and were more willing to take greater financial risks when primed to think about the last day of a month.
Despite all the optimism, Prosper data still showed that those riskier loans made on the last days of the work week and month ultimately had a significantly lower rate of return than loans made on other days.
To mitigate the potential consequences, “platforms such as Prosper, where financial risk-taking is detrimental to both lenders and borrowers, could benefit from making the financial risks associated with higher interest rate loans more explicit,” the researchers suggest. At the same time, they add, an end-of-period optimism boost may be useful for that subset of investors who are risk-hesitant, giving them a helpful push into investments that will likely provide positive returns over the long haul, despite shorter-term risk.
“The end of a work week, end of month, and end of a year are points in time that seem to have a clear impact on the financial choices and financial risk that we take. However, an interesting aspect of the Prosper platform is that the loans do not come to fruition for months or even years after the investors make their bids. Individuals can’t take risks in ways that will pay off and balance their budget in the short term,” says Prof. Shah. “Our research suggests that these socially constructed end-of-period temporal landmarks play an important role and serve as a cue in our decision-making.”
The study appeared in the Journal of Marketing Research.
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Rotman School of Management
University of Toronto
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