Air pollution decreases investment activity
New research from Professor of Economics Steffen Meyer from Aarhus BSS, Aarhus University, shows that investors invest less when air pollution is high.
On a hot day during a conference in Amsterdam, Professor Steffen Meyer and Associate Professor Michaela Pagel were talking about how they felt their productivity had dropped a little after they both had changed jobs.
"While Michaela had left Berkeley in California for Columbia in New York, I had moved from the park-like campus in Frankfurt to the University of Hannover, where my office overlooked one of the busiest intersections in northern Germany," says Steffen Meyer, now a professor of economics at Aarhus BSS, Aarhus University.
"We joked that it was probably the pollution and not the increased teaching load that was making us less productive."
After a brief literature search, they found that pollution does indeed affect our cognitive capacity and productivity. And they were curious to see if they could find a similar effect in their own research area – investment. Would investors' propensity to invest decrease with increased air pollution?
This sparked the two researchers’ idea for the research that led to the article "Fresh air eases work – the effect of air quality on individual investor activity", published in the journal Review of Finance.
Since investing requires cognitive capacity, it seemed logical to assume that investment activity would decrease as investors were exposed to air pollution.
Professor Steffen Meyer, Department of Economics and Business Economics, Aarhus BSS
What is the connection?
Using data from 103,000 German individual investors and air quality measurements from 2003 to 2015, Michaela Pagel and Steffen Meyer investigated the link between air quality and the trading activity of German investors.
"Since investing requires cognitive capacity, it seemed logical to assume that investment activity would decrease as investors were exposed to air pollution," says Steffen Meyer.
And the study’s results did indeed show that poor air quality reduced the likelihood of individual investors logging into their trading accounts and making trades. The reduction was 1.3%, which exceeds the effects of sunshine, which also causes people to invest less.
The research also showed that the air pollution that individual investors were exposed to in the morning continued to affect them negatively in the evening.
"However, once they were logged in, the amount they invested wasn't affected that much. It was rather the initial decision to log in and begin trading that was influenced by air pollution," explains Steffen Meyer.
Finding this effect in a developed country like Germany, which is considered a pioneer in climate action, shows that even relatively low levels of air pollution have a negative impact on our cognitive abilities.
Professor Steffen Meyer, Department of Economics and Business Economics, Aarhus BSS
Germany vs. China
The findings from Steffen Meyer and Michaela Pagel's research challenge the common perception that air pollution is only relevant in highly polluted countries like China.
When the air pollution is heavy in China, authorities recommend that people stay at home. And when people stay at home, they’re more likely to make investments since they have more time on their hands.
The situation is different in Germany, where pollution levels never reach levels that prompt official recommendations to stay at home. Life goes on as usual, and the time investors have to invest remains the same regardless of air pollution levels. This makes Germany an ideal country for conducting this type of study.
"Finding this effect in a developed country like Germany, which is considered a pioneer in climate action, shows that even relatively low levels of air pollution have a negative impact on our cognitive abilities," says Steffen Meyer, adding:
"There are many similarities between Denmark and Germany, both in terms of economic conditions and levels of air pollution, so it’s highly likely that we will see a similar negative correlation between polluted air and decreased investment appetite here in Denmark as well."
Read also: Noise pollution causes violence
Facts
We strive to comply with Universities Denmark’s principles for good research communication. For this reason, we provide the following information as a supplement to this article:
| Type of study: | Empirical study using de-identified administrative bank data |
| External partners: | The anonymous bank, that provided the data. The German Environmental Agency (UBA) that provided the regional air quality data. |
| External funding: | None |
| Conflict of interests: | None |
| Other: | No |
| Link to scientific article: | Fresh air eases work - the effect of air quality on individual investor activity |
| Contact information: | Professor Steffen Meyer, Department of Economics and Business Economics, Aarhus University steffen.meyer@econ.au.dk |