Contents lists available at ScienceDirect Journal of Behavioral and Experimental Economics journal homepage: www.elsevier.com/locate/jbee The High Holidays: Psychological mechanisms of honesty in real-life fnancial decisions Doron Kliger, Mahmoud Qadan ⁎ Faculty of Management, University of Haifa, Aba Hoshi 199, Haifa 3498838, Israel ARTICLEINFO Keywords: Behavior Beliefs Decision-making Honesty Market anomalies Mood Religion VIX Volatility JEL Classification: D03 G02 ABSTRACT Research in psychology has established that activation of religious ideas afects individuals’ behavior. We hy- pothesize that religious and honesty mechanisms activated on the High Holidays, the ten days before Yom Kippur, when people seek repentance, amplify people's anxiety and afect their fnancial decision-making. We fnd that returns during the High Holidays are abnormally low; implied volatility, measured by VIX and VXO, as well as realized volatility estimates, are abnormally high; and the abnormal increase in implied volatility overshoots future volatility. Using these results, we devise a simple trading rule that investors may consider to maximize returns during the High-Holidays period. 1. Introduction “IN GOD WE TRUST,” the ofcial U.S. national motto since the middle of the 20th century, has been decorating the American currency for many years. 1 As such, it is merely one refection of religious stan- dards serving as the basis of social norms and values, which are en- forced by the threat of punishment by God (e.g., Johnson and Krüger, 2004). For instance, tradition in U.S. courts, as well as in nu- merous countries worldwide, dictates that people place their hands on the Bible before they give testimony, perhaps to obligate them to speak honestly for fear that not doing so might be followed by divine adverse retribution (e.g., Johnson and Bering, 2006). 2 Miller and Hofmann (1995) conceive of religious behavior as risk averse and nonreligious behavior as risk seeking, building on "Pascal's wager", a philosophical argument devised in the 17th century by Blaise Pascal, arguing that rational human beings should live as though God exists because if God does actually exist, they will have only a limited loss of some life's pleasures, whereas receive the infnite gains of eter- nity in Heaven. Osoba (2004) fnds that individuals who exhibit risk- averse behavior are more likely to express stronger religious beliefs. Hilary and Hui (2009) report that frms in countries with higher re- ligiosity levels display lower degrees of risk exposure, measured by variances in equity and asset returns. Moreover, they fnd that CEOs switching employers are more likely to join a frm with a religious environment, which is similar to the environment in their former frm. Hong and Kacperczyk (2009) suggest that social norms have an efect on fnancial markets by documenting that “sin” stocks, i.e., the stocks of alcohol, tobacco and gambling frms, have fewer analysts following them, lower institutional ownership, and higher expected returns, and are relatively inexpensive as refected in their low price-to-book or price-to-earnings ratios. Kumar, Page, and Spalt (2011) document that in states with higher ratios of Catholics to Protestants (the former's attitude toward lotteries is considered more permissive), the legaliza- tion and early adoption of state lotteries are more likely, per-capita lottery sales are higher, and individual investors assign larger portfolio weights to lottery-type stocks. Moreover, Shu, Sulaeman, and Yeung (2012) examine the efects of county-level Protestant or Catholic ratios on return volatilities of mutual funds, establishing that Catholics exhibit less aversion to speculative risk than Protestants. Jiang, Jiang, Kim, and Zhang (2015) report that family frms with religious founders https://doi.org/10.1016/j.socec.2018.12.012 Received 12 August 2018; Received in revised form 13 December 2018; Accepted 31 December 2018 ⁎ Corresponding author. E-mail address: Mqadan@univ.haifa.ac.il (M. Qadan). 1 In 1956, the United States Congress passed an act adopting "In God We Trust" as its ofcial motto (Cf. Title 36 of the United States Code, Chapter 3, § 302). 2 The notion of punishment for contravening God exists in ancient Greek culture, the three monotheistic religions and even in Eastern Asian and Indian religious traditions. Journal of Behavioral and Experimental Economics 78 (2019) 121–137 Available online 04 January 2019 2214-8043/ © 2019 Elsevier Inc. All rights reserved. T