Advisors are routinely entrusted with safeguarding their clients’ financial health. But new research shows there is much more at stake. Automobile accident fatalities and suicide rates are closely correlated with stock market declines.
The evidence about suicide rates comes from a 2018 study by Tomasz Piotr Wisniewski of the University of Leicester and Brendan John Lambe of the De Montfort University in Leicester, Do Stock Market Fluctuations Affect Suicide Rates?
The research on car fatalities, also published earlier this year, was by Corrado Giulietti of the University of Southampton, Mirco Tonin of the Free University of Bozen-Bolzano, CESifo, Dondena Centre and IZA, and Michael Vlassopoulos of the University of Southampton and IZAin their paper, When the Market Drives You Crazy: Stock Market Returns and Fatal Car Accidents.
I’ll review what those papers found and then talk about the practical implications for advisors.
Suicides and stock market returns
Wisniewski and Lambe studied data from 36 countries (including the U.S.) for which both suicide rates and stock market returns were available. They used data from 1970 through 2014. They controlled for other variables that might explain suicide rates, such unemployment, inflation and health expenditures.
They found that there is an inverse relationship between stock market fluctuations and suicidal tendencies, and that holds true for both men and women. Those results were statistically significant.
The authors noted that there were 6,566 suicides as a result of the 2008 stock market crash, roughly twice as many as died in the 9/11 attacks. But the suicides received far less media attention than the terrorist deaths.
Car fatalities
Giuletti and his coauthors used data from 1990 to 2015 in the U.S. for automobile accident fatalities. They found that a one standard deviation reduction in daily stock market returns increases the number of fatal accidents by 0.5%. They controlled for a number of other variables, including the day of the week and the weather.
The authors divided the data into two parts – the hours before the market open and the time after the market open. They found that fatalities were more frequent in the latter period, reinforcing the finding that there was a causal relationship between stock market returns and driving patterns. They also found that the relationship between market returns and fatalities was stronger for drivers over age 25. They hypothesized that those under age 25 were less likely to own stocks, further strengthening their causal hypothesis.
They also found that fatalities were more frequent among drivers who resided in zip codes with higher average incomes and among drivers with more expensive car models. Those wealth-related factors should correlate to greater stock market holdings, building on the author’s causal hypothesis.
Auto accidents are classified into four causes: distraction, recklessness, speed and drunkenness. Only the relationship between recklessness and stock market returns was statistically significant; the other three were not. From this finding, the authors hypothesized that it was reckless driving was caused by poor market returns.
Lastly, they found that accidents increased in the second half of the 1990s, when stock market participation also increased.
Implications for advisors
The authors of the suicide study noted the following:
Guidance should be directed not only to the investors for whom the vagaries of the market have a direct consequence, but also to those who recommend investment plans for others. Financial advisors should bear in mind that acting in the clients’ best interest requires consideration of their emotional and psychological well-being. In order to do this, assistance may be required from the medical profession. Associations of investment professionals should collaborate with mental health experts to come up with clear guidance on how to identify vulnerable individuals. Upon recognizing clients who may be at risk, advisors should recommend a low risk portfolio with an underweighting in stocks. For people with suicidal tendencies, the benefits of achieving higher expected returns from taking on additional risk pales in comparison to the threat to life that this danger presents.
I don’t agree with the recommendation of reducing a client’s risk exposure by, for example, underweighting stocks. For one, bonds can be volatile too, and there’s no assurance that whatever asset the advisor bought to replace the stocks would not trigger a dangerous response by the client. More importantly, adjusting a client’s asset allocation should not be an alternative seeking the proper medical attention.
Without medical qualifications, advisors should not attempt to assess the psychological health of their clients or the risks of suicide and reckless driving. If they sense that their clients are vulnerable, they should urge them to seek medical attention.
This research highlights that the crucial role of a financial advisor extends beyond achieving successful financial outcomes. There is a need for ways for practitioners to identify signs that their clients may be vulnerable, and to have the proper pathway and guidance for how to counsel clients to seek medical attention. I hope that the profession will take up this challenge.
Read more articles by Robert Huebscher
