How The Circadian Rhythm Affects Investment Decisions

Most of us are morning or evening types, with our best performances achieved when we tap into this circadian rhythm.  Research from Indiana University highlights how this can be especially important for startup investors, as if they try and beat their body clock they could end up making much poorer investments.

“Early-stage investments—when not a lot is typically known about a company and the time to make a decision is compressed—can be risky with high failure rates,” the researchers say. “Trying to pick a winner is difficult enough under those circumstances, but we’ve also learned that when you make those decisions can have a significant impact on whether they turn out to be successful.”

Keeping in time with our internal clock

We each have an internal body clock that helps to regulate our level of alertness and our sleep-awake cycles.  We typically fall into one of three types that determine when we are most alert during any given 24-hour cycle.  Larks typically thrive most earlier in the day, with owls most active later on.  The third group then operates somewhere in between.

What we found was when individuals evaluated an investment opportunity at a time that conflicted with their body’s natural internal clock—for example, a morning person or lark making a decision late in the day or evening—they tended to make poor choices,” the researchers say. “This tension may not be recognized by those making the investment decision and over time could result in substantial losses for people who, on average, possess much less investment knowledge than angel investors and venture capitalists.”

The researchers examined early-stage investment decisions via an equity crowdfunding platform that allows non-professional investors to pump a relatively small amount into a startup in return for a small ownership stake.  The researchers surveyed participants to understand whether they were morning or evening people, as well as both their investment experience and location (and therefore timezone).

Making decisions

The volunteers were also asked to complete a task in which they were given $1,000 to invest and asked how much they would allocate to specific companies.  They were each allotted a specific time to complete the task in.  Each of the companies was based on actual investment opportunities and contained a mixture of those that had done well and those that had performed poorly.  The participants also had to report their level of crowdfunding experience and sleep quantity.

The results reveal that own investors tended to invest more unsuccessfully than their lark peers when they did so in the morning, while the reverse was the case when larks invested in the evening.  Interestingly, the same kind of errors were occurring in both situations.

“Prospective equity crowdfunding investors, who may be making decisions before or after their normal daily work schedule, should be cognizant of the time they select to mull investment choices,” the researchers conclude. “These investors would do well to match their lark or owl tendencies with the timing of their investment decisions.”

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