As the Dow Jones industrial average plunged 513 points last Thursday, then gyrated wildly on Friday, all of Wall Street seemed to be asking the same question: What the heck is going on? Evidence that the American economy is bad and growing worse has been piling up for a while now. And it’s not as if we didn’t know Europe had a debt problem.
Why, then, all these crazy swings?
One possible answer comes from, all of places, the fields of psychology and neuroscience. In recent years, an area of study called neurofinance has tried to use brain science to explain how our primal circuits can, and often do, override our reason when it comes to investing.
Many experts say the 2008 financial collapse recalibrated investor psychology. After living through the collapse of Lehman Brothers and the panic that followed, some investors are apt to sell first and ask questions later. Wall Street’s notion of worst-case scenarios has darkened considerably.
Some large investors, including wealthy individuals who lost big during the 2008 collapse, have more or less been stashing money under the mattress. They have been selling investments aggressively and seeking safety in cash. Over the last three weeks or so, hedge fund managers have been betting that stocks will fall further.
It seems clear that Wall Street is finally realizing what many ordinary Americans have been feeling for a while: these hard times are turning harder. Sure, major American corporations are making fistfuls of money. But smaller businesses aren’t. The American consumer confronts a toxic mix of weak home prices and high unemployment. Confidence is fragile.
Source: The New York Times, August 7, 2011
Robert R. Prechter Jr.: Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression