Nice paper by Anat Bracha and Elke U. Weber of Boston Fed.
They look at financial panics from a behavioral perspective:
To preview our main point, we argue that the human need for predictability and control is central to a psychological account of panics. Confidence in a system such as a financial market results when investors believe they understand how things work, which leads to a sense of predictability (Einhorn 1986). This sense of predictability gives investors a feeling of control, which then legitimizes further opportunity seeking (reaping benefits while avoiding catastrophic losses) that is often riskier than it is perceived to be (Hertwig et al. 2004). We argue that events that destroy this sense of predictability and perceived control trigger panics, the feeling that crucial control has been lost and that the future is unpredictable, and hence, dangerous.
Resulting behavior, including a retreat to safe and familiar options, aims to minimize exposure to such danger until a new model of how things work has been established. We build our suggested psychological account of panic by starting with a description of human perception and reaction to risk and uncertainty as seen by psychology. We introduce and describe the concept of perceived control, and the difference between learning from description versus learning from experience in determining perception and choice under risk and uncertainty. We continue by discussing the illusion of control and its contribution to irrational exuberance or mania, and the flip side of it—the relationship between perceived lack of control and panic. Finally, we discuss economic models of panic and suggest how to incorporate the psychological insights introduced in this paper into existing economic models. We emphasize that our analysis is exploratory. It suggests a different way of thinking about financial panics and it is therefore meant to be provocative.
Excellent read. All in English…
January 14, 2013 at 11:17 pm |
Richard Howitt,a well known economist ,at the University of California,once said:”models are to be used,not believed.”
The perennial question remains dimensional,i.e;economic,
political,institutional,technological,ecological ,and legal.
Henry Fayol,considered as the Father of French Management,
attributed six functions to any enterprise,nameley,production,
distribution,administrative,financial,accounting,and security of
goods and people.One can’t help but pay a tribute,posthumously
to Kurt Lewin,considered as the Father of “Goup Behavior.”In
his own words,”behavior is function of the individual and the
environment.;Reference was made to the concept”basic human
stated”stated by Maslow,in 1954,yet,UN Agencies took it in
account when delineating their strategy to attack poverty,twenty
five years later.;Alexander Pope,a pet and philosopher,once said:
“Know then thyself,Presume not God to scan,the Proper study of
Mankind is Man.”
February 3, 2013 at 11:02 am |
[...] A fascinating paper by Anat Bracha and Elke Weber entitled “A Psychological Perspective of Financial Panic” (h/t Mostly Economics). [...]
May 7, 2013 at 12:16 pm |
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