Air pollution, behavioral bias, and the disposition effect in China

Inspired by the recent health science findings that air pollution affects mental health and cognition, we examine whether air pollution can intensify the cognitive bias observed in the financial markets. Based on a proprietary data set obtained from a large Chinese mutual fund family consisting of complete trading information for more than 773,198 ac-counts in 247 cities, we find that air pollution significantly increases investors' disposition effects. Analysis based on two plausible exogenous variations in air quality (the vast dissi-pation of air pollution caused by strong winds and the Huai River policy) supports a causal interpretation. Mood regulation provides a potential mechanism. (c) 2019 Elsevier B.V. All rights reserved.

Automated summary

The study found that air pollution significantly increases investors' disposition effects, potentially exacerbating cognitive bias in financial markets, which may be due to mood regulation mechanisms.