In 30 seconds
As the World Cup gets underway, a landmark study by LBS Professor of Finance Alex Edmans – which found that football results can move financial markets – remains more relevant than ever.
The effect is strongest after World Cup eliminations, when heightened emotions can wipe billions off a country's stock market.
Nearly two decades on, the research offers a powerful reminder that investor psychology and sentiment can shape asset prices.
Are financial markets driven solely by investors' rational assessments of future cash flows and discount rates? Or can something as intangible as emotion – the result of a football match, even – influence asset prices?
That was the question posed by LBS Professor of Finance Alex Edmans and his co-authors, Diego García and Øyvind Norli, in their seminal 2007 paper, Sports Sentiment and Stock Returns. As another FIFA World Cup unfolds, the study feels as timely as ever. Published in The Journal of Finance, the study went on to become one of the landmark papers in behavioural finance, demonstrating that investor psychology and emotion can shape markets in surprising ways.
“My goal was not to study just specifically how football affects the stock market,” Alex explains, “but – more generally – how mood affects the stock market, and football was just my measure of mood.”
The mood factor
Alex and his co-authors collected data on 1,162 international football matches played by national teams from dozens of countries over several decades. They then examined how each country's stock market performed on the trading day after those matches. Crucially, they controlled for factors that normally influence market movements, including global market performance, previous stock returns, day-of-the-week effects and seasonal patterns. This enabled the researchers to test whether the emotional impact of sporting outcomes could spill over into financial markets.
Why losses hurt more than wins
Their hypothesis was correct, and what’s more, they found that defeats matter more than victories. After a national team lost, the domestic stock market tended to fall the next day. By contrast, victories produced little or no comparable boost.
This asymmetry is important: Alex and his fellow researchers deduced that psychologically people react more strongly to losses than gains. Losing hurts more than winning feels good. And World Cup defeats, they discovered, had the biggest impact – unsurprisingly, perhaps, because the FIFA World Cup is the competition that tends to generate the greatest emotional investment worldwide. Following a World Cup elimination, the researchers found an average stock market decline of approximately 0.5 per cent in the losing nation the next trading day. For a large market like the UK, that can amount to billions of pounds in market value being wiped out.
“What surprised me most about the paper's impact was how open-minded people were to the results.”
This effect was also stronger in knockout games, as opposed to qualifiers, and among smaller stocks, which tend to be more sensitive to investor sentiment and are more likely to be owned by domestic investors.
When the paper was first published, much of finance theory was built on the assumption that markets are largely rational and prices reflect fundamentals. The paper garnered significant media attention. “What surprised me most about the paper's impact,” Alex reflects, “was how open-minded people were to the results. I was a bit worried people would think, ‘Well, why is he studying the effect of football on the stock market? That's crazy. How could football results ever affect the stock market?’”
And yet both press and fellow academics were remarkably receptive, Alex notes: “People did realise that this was quite plausible. People were open to the fact that emotions drove markets, and they realised that this was an important study.”
As Alex and his co-authors observed, investors are human, and a painful defeat can therefore temporarily lower their mood – which can in turn affect their judgment in subtle ways. That negativity spills over into decision-making, making them slightly more inclined to sell shares or value them less favourably.
Subsequent research has continued to explore and support the idea that investor sentiment can influence market prices. “In the 2014 World Cup,” Alex says, “I did a CNN interview with Richard Quest, and this was before the start of the tournament. After the interview, he said, please track what happens in the tournament and see whether everything plays out as you suggest.” Quest asked Alex to come back on the show again, when his predictions turned out to be correct.
“If the market can be affected by something as crazy as football results, then this opens the door to lots of other mispricings, bubbles, crashes, hype, mania.”
Meanwhile, a follow-up paper by other researchers demonstrated how investors could potentially trade on the effect that Alex and his co-authors had identified to make money. “When we wrote the study, we didn't use this as a trading strategy,” Alex explains. “Instead, we wanted to show that the market is affected by emotions, but subsequent researchers devised a strategy based on that.”
The rise of emotional investing
Alex argues that these insights matter more today than ever, because today’s markets are increasingly affected by emotion. Why? “Firstly,” Alex says, “many of the companies that we are investing in are valued in terms of intangibles. So their value is not bricks and mortar – something which there's less uncertainty about – but things such as the future of space exploration, were you to take SpaceX for example.” The role of sentiment is much higher in these kinds of investments, Alex argues.
Secondly, he continues, the picture of who is trading has changed too. “Increasingly trading is by retail investors,” he observes, “with apps like Robinhood democratising the stock market.”
So not only are companies themselves much more susceptible to swings in sentiment, but the investors trading them may be too.
“Sometimes prices move without being justified by fundamentals, so we should avoid panic buying or panic selling based on short-term market movements.”
Because of this renewed relevance, Alex has chosen to open his new book – The Madness of Markets – with this study. “If the market can be affected by something as crazy as football results, then this opens the door to lots of other mispricings, bubbles, crashes, hype, mania,” he says, “which is the theme of the book – how it’s emotions, not fundamentals, that drive the market.”
Buying the dip
If we want to invest effectively, we need to be conscious of this, Alex argues, and resist succumbing to our emotions. “So if the stock market goes down, we often think, oh, let's exit the market completely and never invest again, because the stock market is so crazy,” he explains. “But actually, sometimes the stock market can go down, even if the economy has not suffered a huge decline. Sometimes prices move without being justified by fundamentals, so we should avoid panic buying or panic selling based on short-term market movements.”
If you’re brave enough, Alex continues, you can even look to exploit the “madness of markets.” He cites how, during the Covid pandemic, many smart investors actually invested more as markets fell. He also points to Clare College, Cambridge, which invested £10 million in equities at the depths of the 2008 financial crisis because it had a 40-year investment horizon.
“So knowing that sometimes markets overreact on the way up and the way down,” Alex concludes, “this can give you trading strategies, for example, to buy the dip. And if you have a long horizon and courage, you might be able to buy underpriced stocks.”
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Alex Edmans
