Smoking Habits in Financial Markets: Nicotine, Stock Returns and Rationality

This study explores the impact of nicotine withdrawal on investor behaviour and stock market performance, integrating insights from behavioural finance and neurofinance. We hypothesise that smoking, particularly nicotine, enhances mood and stimulates decision-making through dopamine release, while withdrawal induces a negative mood and reduced stimulation, potentially impairing rational decision-making. Using data from ‘No-Smoking Day’ in the UK (1984–2024), we examine whether market participants who smoke and observe this day, experiencing withdrawal symptoms, display abnormal market behaviour. Our analysis of Wednesday stock returns reveals weak evidence for nicotine withdrawal effects over the entire period. However, when key factors such as the proportion of smokers, quitters, and UK investors are taken into account, the evidence is strengthened, particularly during the period from 1991 to 2024, which may suggest that anti-smoking campaigns in the UK during this period had a greater impact. These findings suggest that nicotine withdrawal leads to less rational decision-making, supporting previous research on behavioural anomalies and market inefficiency. Future research could leverage neuroimaging techniques to explore the neural mechanisms underlying withdrawal-induced decision-making and further investigate the relationship between addictive behaviours and market efficiency. This study contributes to the understanding of how physiological and psychological factors, such as nicotine withdrawal, can influence financial markets and investor behaviour, challenging traditional assumptions of investor rationality. JEL Codes: D87; G10; G4