Office Hours: Jason Schloetzer Reveals the Negative Impact of Extreme Temperatures on the Perceptions of the United States Economy
Unusual temperatures due to climate change pose detrimental impacts to economic activities and the habits of many consumers. Individuals’ beliefs about economic conditions and their consumption habits are greatly influenced by the negative impacts of climate change.
In his recent paper, Jason Schloetzer, associate professor of business administration and area coordinator of accounting and business law at Georgetown University’s McDonough School of Business, examines the impact of extreme temperatures on perceptions of the overall state of the U.S. economy and how these perceptions impact stock returns.
Please describe your main research findings. What is the impact of “extreme” local temperatures on an individual’s beliefs about U.S. economic conditions and the stock returns of local firms?
This paper basically says that when it’s unusually hot or cold outside, people are more pessimistic about the current and future state of the U.S. economy, and this negative sentiment drives abnormal declines in the stock returns of local companies.
The way we arrive at this result is to connect three streams of academic literature – studies that focus on what happens to stock prices when investors believe the stock market is in good or bad shape; studies that examine the psychology behind how people form their beliefs about various economic activities, such as the implications of being overconfident or conservative; and studies that look at how climate influences individuals’ beliefs and economic outcomes, such as whether people are more likely to believe climate change is real when it’s hot outside or how higher temperatures lead to declines in mental health.
We leverage all of this prior research to examine how individuals form beliefs about U.S. economic conditions and the implications of these beliefs for stock returns, and we do this within the same study. Taking this approach, we find that “extreme” local temperatures help explain differences in people’s sentiment about the economy. And, we show this temperature effect exists beyond any relation between extreme temperatures and firm or local-level economic variables. This last part is important because extreme temperatures may, for instance, reduce working hours if you generally work outside, or may change your shopping behaviors – things that can directly influence the local economy. We then show that the connection between extreme local temperature and individuals’ sentiment about the economy relates to abnormal declines in the stock returns of local firms. Studies have shown that individuals tend to overweight their holdings of local stocks, so we use this fact to examine whether local sentiment relates to local stock returns.
What led you to conduct this particular research?
My coauthor on this paper, Christos Makridis, started talking about potential projects, and I was interested in the unique data we used to do this work. The analysis relies on data from Gallup’s U.S. Daily Poll, which provides the daily-level economic sentiment of a population-representative random sample of 1.5 million individuals and combines it with finely-measured daily weather conditions based on the survey respondent’s location. The data provided a unique opportunity to study how temperatures influence the beliefs of Americans across the country – we have anonymized data from nearly all counties across the United States and daily temperatures at the ZIP code level. To me, it was a neat research setting to think about this question.
As the topics of climate and environmental concerns continue to take center stage across various political and social landscapes, how do you believe your research findings will play a role in these conversations?
To fix ideas, let’s think about emissions modeling. These models are trying to simulate economic behavior, and they take the perspective that people and businesses will make decisions that are economically rational for them. For instance, if gasoline prices are sufficiently high, 100% of people will buy an electric vehicle, and this switch will change emissions profiles going forward. Emissions modeling relies heavily on economic modeling. We can probably guess that 100% of people and businesses won’t make the purely economically-rational decision. Emissions models consider this through a series of assumptions and restrictions, but it’s not an exact science. Our study provides a small contribution to a larger literature that shows how climate influences behavior and economic outcomes-extreme temperatures influence individuals’ beliefs about the strength of the current and future U.S. economy, which may impact their economic-focused decisions in the face of climate change.
What new questions does your research create regarding the topic of climate change more broadly?
I teach courses focusing on how managers use financial and non-financial information to make decisions. The result in this paper about how extreme temperatures more strongly affect individuals’ views of the future strength of the U.S. economy is quite interesting because it fits with studies that find climate factors impact other future-oriented decisions, such as individuals’ expectations of future energy prices. This raises the potential for climate-related factors to influence managerial decisions internal to the firm that require assessments of the future, such as forecasting, target setting, and capital investment decisions. These would be potentially interesting areas to explore, given what we know from existing research and the results of our current study.