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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. Eric Johnson & Suzanne Shu & Benedict Dellaert & Craig Fox & Daniel Goldstein & Gerald Häubl & Richard Larrick & John Payne & Ellen Peters & David Schkade & Brian Wansink & Elke Weber, 2012. "Beyond nudges: Tools of a choice architecture," Marketing Letters, Springer, vol. 23(2), pages 487-504, June.
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    8. Ulrike Malmendier & Stefan Nagel, 2009. "Depression Babies: Do Macroeconomic Experiences Affect Risk-Taking?," NBER Working Papers 14813, National Bureau of Economic Research, Inc.
    9. Samuelson, William & Zeckhauser, Richard, 1988. " Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
    10. Christopher L. Foote & Kristopher S. Gerardi & Paul S. Willen, 2012. "Why did so many people make so many ex post bad decisions? the causes of the foreclosure crisis," Working Paper 2012-07, Federal Reserve Bank of Atlanta.
    11. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    12. Gerlinde Fellner, 2004. "Illusion of control as a source of poor diversification: An experimental approach," Papers on Strategic Interaction 2004-28, Max Planck Institute of Economics, Strategic Interaction Group.
    13. Bracha Anat & Jamison Julian C., 2012. "Shifting Confidence in Homeownership: The Great Recession," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(3), pages 1-48, October.
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