Do you listen to your President? An Examination of the effect of Cognitive Illusions And their Effect on Next Day Investor Behavior

Abstract

The purpose of this paper is to initially provide the framework that allows for actors in the market to act irrationally, which has a short-term effect on valuation of prices. It asks the question: Does the State of the Union Address affect investor behavior the next day? More specifically, is there an abnormal change in the volume of trades the next day within a sector of industry if the President frequently refers to that sector in his speech? Using an event study framework, this paper finds excess in abnormal volume year after year for the Sectors of Defense and Aerospace, Energy, and Healthcare. There appears to be a directional correlation between an address’s Sector Score and the Mean Excess Volume by Year.