Something In The Air: Pollution goes up, stocks go down

Columbia University researchers reveal that stock market traders are more cautious on days with elevated air pollution

What usually comes to mind when you think about pollution? Probably not the stock market. One team of Columbia University scientists at the Mailman School of Public Health studied the relationship between levels of New York City pollution and the results of the S&P500.

Columbia University Professor Matthew Neidell and his team weren't really sure if there would be a connection between pollution and the stock market, but were inspired to try a study anyway. “Other studies have found relationships between pollution and cognition and cognition is related to risk aversion well, why not see if there’s a relationship between pollution and stock market returns?"

Neidell has found that when pollution gets higher, peoples' cognitive performances decline. When you apply this to the stock market, traders are less willing to take risks. "They're gonna shift way from the stocks on the S&P 500 and go to safer investments instead."

Neidell’s team tested this correlation multiple times. The more things they threw at the theory, the more it held true. The study even included tests in other cities where the S&P 500 is traded.

Some find the connection between pollution and stock market trading tenuous at best. "You can find a lot of correlations right, like which ice cream flavor sales influence which political part does well,” said Ian Downs, who works on Wall Street.

His colleague, Simir Ghali agrees, “I think it’s such a complex system that you can’t really isolate one variable from a single city that would actually have a substantial effect on the exchange."

But, Neidell's research extends beyond the trading floor. He said anyone’s decisions could be affected by the air they’re breathing in. “On a daily basis we make all kinds of calculations, solve all kinds of complex problems, figuring out what to eat, applying discounts when we go shopping, other financial transactions that we’re involved in. All of those things involve cognitive processing and complex problems."

Neidell’s previous work looked at manual workers, specifically field workers who picked berries. On days that pollution was higher, their productivity, or the amount of berries they picked, went down. His team found similar results while monitoring pollution levels at a call center in China. The decisions made at desk jobs demand higher thinking so they decided to take it one step further and test their theory on stock traders. They’ve concluded one thing from this, “if pollution is effecting the outcomes of stock market traders, I think it’s reasonable to think that its effecting our everyday decisions as well."

Neidell acknowledged that this is just one study showing the correlation between high pollution levels and results of the S&P 500. His team is now testing this theory on Columbia University students. They’re asking them to fill out a survey on any given day. The building they enter has monitors recording daily pollution levels. They expect to release findings by the end of next year.