DEEP sleep: The impact of sleep on financial risk taking

• Date: 01 January 2019
• DOI: http://doi.org/10.1002/rfe.1034
• Author: John R. Nofsinger,Corey A. Shank
• Published date: 01 January 2019

SPECIAL ISSUE ARTICLE

DEEP sleep: The impact of sleep on financial risk taking

John R. Nofsinger

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Corey A. Shank

2

1

Accounting and Finance Department,

College of Business & Public Policy,

University of Alaska Anchorage,

Anchorage, Alaska

2

Wright School of Business, Dalton State

College, Dalton, Georgia

Correspondence:

John R. Nofsinger, Ph.D., Accounting and

Finance Department, College of Business

& Public Policy, University of Alaska

Anchorage, Anchorage, AK.

E-mail: jnofsinger@alaska.edu.

Abstract

In this paper, we examine the relationship between sleep and financial risk taking.

The results indicate that individuals who have better sleep display less distortion

of probability, are less susceptible to the present bias, and have a lower discount-

ing rate. Specifically, individuals with better self‐reported sleep quality have less

distortion of probability, a more curved utility function, and are less loss averse,

while those with fewer sleep disturbances display less probability distortion and

have more curvature in their utility function. Overall, the results show that there

are cognitive deficits in financial decision making by having poor sleep habits

that can have important consequences.

JEL CLASSIFICATION

G02, I10

KEYWORDS

loss aversion, present bias, probability distortion, risk taking, sleep

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INTRODUCTION

Long hours and extreme stress is the typical environment for financial traders (Kahn & Cooper, 1990; Kahn, Cooper, &

Elsey, 1994; Oberlechner & Nimgade, 2005) and company executives (Cooper & Sutherland, 1991). One of the most

important ways to cope with high stress and working long hours is sleep (Rodahl, 2003). Sleep is an essential facto r for

health and circadian rhythms. For example, Tanaka et al. (2002) found that individuals who report poor sleep quality have

a higher number of illnesses and worse overall health. In fact, Bellesi et al. (2017), concluded that sleep loss can cause the

brain to start eating itself as portions of the synapses in the brain are consumed by astrocytes. Additionally, sleep loss leads

to deficits in fundamental cognitive processes such as concentration, attention, and memory (Dinges et al., 1997; Ellenbo-

gen, 2005; Harrison & Horne, 2000; Smith, McEvoy, & Gevins, 2002).

Sleep is also an important factor in risk taking. Sleep deprivation is associated with self‐reported socially risky activities,

such as alcohol, cigarette, and drug use (McKnight‐Eily et al., 2011; O'Brien & Mindell, 2005; Schoenborn & Adams,

2008; Vail‐Smith, Felts, & Becker, 2009; Yen, King, & Tang, 2010), as well as suicidal behavior (Blasco‐Fontecilla et al.,

2011; Pasch, Laska, Lytle, & Moe, 2010). Additionally, lack of sleep is shown to increase financial risk taking in studies

using the Iowa Gambling Task (Killgore, Balkin, & Wesensten, 2006; Killgore, Grugle, & Balkin, 2012; Killgore, Lipizzi,

Kamimori, & Balkin, 2007), Balloon Analog Risk Task (Killgore, 2007; Killgore et al., 2008; Killgore et al. 2010), and

lottery choice (Mckenna, Dickinson, Orff, & Drummond, 2007).

However, the Iowa Gambling Task is a task of cognition to examine the functioning of the prefrontal cortex (Lawrence,

Jollant, O'daly, Zelaya, & Phillips 2009). In the Iowa Gambling Task, participants draw from four decks that have different

distributions of winner and loser outcomes. Healthy participants, with proper prefrontal cortex function, eventually discover

which decks have better distributions and stick to them rather than draw from the disadvantageous deck. Thus, even though

“gambling”is in the title, the Iowa Gambling Task is not a financial risk experiment. Both the Iowa Gambling Task and

Received: 2 November 2017

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Accepted: 18 April 2018

DOI: 10.1002/rfe.1034

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© 2019 University of New Orleans wileyonlinelibrary.com/journal/rfe Rev Financ Econ. 2019;37:92–105.