Sleep Debt and Information Processing in Financial Markets

Abstract

Despite growing evidence of the importance of sleep for performance, prior research generally finds limited effects of sleep disruptions in financial markets. Using forecasts of corporate earnings, we are able to reconcile this dissonance. We find that non-professional forecasters exhibit a significant decline in their forecast accuracy and optimism following Spring Daylight Saving Time changes relative to professional forecasters. Placebo tests provide support for sleep disruptions as the main driver of these effects. Additionally, we provide corresponding evidence using survey data that sleep disruptions relate to more pessimistic economic forecasts by U.S. households. Collectively, our evidence that information processing by less skilled market participants is particularly susceptible to negative sleep loss effects helps reconcile why financial markets are generally believed to be immune to sleep effects even though individual participants are not, and suggests that sleep debt could widen the wealth transfers from U.S. households.