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A psychological perspective of financial panic

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  • Anat Bracha
  • Elke U. Weber
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    Abstract

    In spite of large number of financial crises, often depicted as episodes of financial panic, the notion of panic in financial markets is not very well understood. Many have argued that in order to understand financial crises, and in particular panic events, we need to go beyond classic economic arguments. This paper is an effort in that direction, in which we attempt to give a psychological account of panic and of panic in financial markets in particular, by discussing uncertainty, the desire for predictability and control, the illusion of control, and confidence. We suggest how one might incorporate these psychological insights into existing economic models.

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    File URL: http://www.bostonfed.org/economic/ppdp/2012/ppdp1207.htm
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Boston in its series Public Policy Discussion Paper with number 12-7.

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    Date of creation: 2012
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    Handle: RePEc:fip:fedbpp:12-7

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    Related research

    Keywords: Financial crises;

    This paper has been announced in the following NEP Reports:

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    1. Itzhak Gilboa & David Schmeidler, 1992. "Case-Based Decision Theory," Discussion Papers 994, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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    7. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
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