Psychological Nature Of Markets Can Be Examined By Looking At Major Market Crashes

Thursday, July 19, 2012 08:40
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Psychological Nature Of Markets Can Be Examined By Looking At Major Market Crashes

Tags: investing | investor behavior | markets

The issue of how human behavior affects financial markets and vice versa is a question that is asked often, especially in light of the growing use of behavioral finance in designing investment strategies. Are market disasters caused by collective human pessimism? Does optimism also have the power to move markets?

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Taking a look at some of the market’s worst trading days may shed some light on just how influential behavior is on the marketplace. When Pearl Harbor occurred, the market lost 2.92% the first day and another 2.89% the next day. Its close after the second day was 107.56.
 
September 11, 2001 closed the markets for several days. They had already declined 18% from the 2000 high and markets declined another 7.13% to confirm bear market status. The attack happened while the US economy was already in recession with the markets in a decline. After October 9, 2002, the markets once again began to rise.
 
On a more localized case, Hurricane Katrina happened when the economy was on the upswing. Still, the event impacted US gross domestic product by .35%. The strength of the economy at that time made the disruption in oil production have less effect.
 
The way information is disseminated may feed directly into the belief that human behavior indeed causes market movements. Looking at the backdrop of economic conditions when different market collapses occurred can give some insight into the psychological nature of the marketplace.

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