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A psychological perspective of financial panic

  • Anat Bracha
  • Elke U. Weber
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    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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    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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    3. 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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    7. George A. Akerlof, 2009. "How Human Psychology Drives the Economy and Why It Matters," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(5), pages 1175-1175.
    8. Eric, Van den Steen, 2002. "Skill or Luck? Biases of Rational Agents," Working papers 4255-02, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    9. Ulrike Malmendier & Stefan Nagel, 2011. "Depression Babies: Do Macroeconomic Experiences Affect Risk Taking?," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 373-416.
    10. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
    11. 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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    14. 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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