March Madness has begun: Beware of your mood

By Dian Vujovich

The March Madness I’m referring to here has nothing to do with Japan’s devastating earthquake, tsunami and nuclear mess. Nope, I’m talking good ole b-ball. The game where sneakers make squeaky sounds on the games’ wooden floors and folks make goofy bets about who is going to win and lose.

Earlier this month, Mark Hulbert wrote about March Madness and referred to a study done a few years ago in the Journal of Finance. The study was titled, “Sports Sentiment and Stock Returns. ” It was authored by professors from Wharton, the University of North Carolina and the Norwegian School of Management who looked at what happened to a country’s stock market after big-time matches— like those of soccer, rugby and basketball games.

What they found was that after a country’s team lost in the World Cup, its stock market dropped by a tiny amount equal to about 38 basis points. But Hulbert writes that from a statistical point of view, that’s equivalent to an annual loss of more than 60 percent. (See, little moves really can make big things happen.)

Of course the researchers could find no rational reason for the drop other than it was caused by the “impact of sports results on investor mood.”

Moods. They get us into trouble all the time when it comes to making money in the market. Even the smartest whiz kids on Wall Street succumb to emotional fits of irrational exuberance on both the upside and downside of current market happenings. So it’s no surprise that we do too.

Given that the tournament has already begun, and the bets already placed, I’m hoping for a win from a team that most day-traders have bet on. That way, if the research is any indication of what’s to come, the market might have an up day. We’ll see when March Madness ends in early April.