Stock Market Crash: Understanding the Panic

by Ben Steverman
Friday, October 10,2008 by Ben Steverman


Market psychology experts weigh in on what's feeding the selling frenzy on Wall Street and when to look for investors' moods to change

Searching for a way to describe the current stock market meltdown? Call it the "Panic of 2008."

In the past century, the world has seen countless financial crises, economic downturns, and market crashes. But the last major event to be called a 'panic' was the Panic of 1907.

If ever it were appropriate to revive the term "panic," this is the time. The day-after-day declines in the stock market are unprecedentedSo when might this downward spiral end?

Because of our flight-or-flight instincts, Subrahmanyam says, "things are very quick to crash." But "the recovery takes much longer."

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"The market ultimately reaches a bottom," says Georgetown University finance professor Reena Aggarwal. However, "no one wants to be the first to move. The markets behave in a herd mentality."

Pasquariello worries governments may simply blame market troubles on panic and irrationality—"on people being crazy." That gives them the excuse to step in and try to restore market confidence in artificial ways—such as the its recent ban on the short-selling of financial stocks, which he opposed. The real reasons for the financial crisis will "take a long time to fix," Pasquariello warns.

By its nature, a crisis is a time of uncertainty. It could be months before we know whether markets are crashing because of irrational fear or because of real economic problems. And that's scary.

Steverman is a reporter for BusinessWeek's Investing channel.
Copyrighted, Business Week. All rights reserved.

Market psychology experts weigh in on what's feeding the selling frenzy on Wall Street and when to look for investors' moods to change

Searching for a way to describe the current stock market meltdown? Call it the "Panic of 2008."

In the past century, the world has seen countless financial crises, economic downturns, and market crashes. But the last major event to be called a 'panic' was the Panic of 1907.

If ever it were appropriate to revive the term "panic," this is the time. The day-after-day declines in the stock market are unprecedented