Science unveils hidden drivers of stock bubbles and crashes

Science unveils hidden drivers of stock bubbles and crashes

by Marlowe Hood and Richard Ingham Thu Sep 18, 9:55 PM ET

PARIS (AFP) - Many economists believe that investors make decisions rationally, weighing up corporate data and other pricing signals to evaluate gain or risk before buying or selling stocks.
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But this keystone belief in how markets function is now under mounting attack after this month's global stocks crash, the latest in a string of financial shocks over the past two decades.

Proponents of rival concepts say that primitive emotions, herd mentality and raging hormones are among the invisible motors that help inflate an asset bubble and then prick it."In standard economic theory, the way that prices in all markets are meant to be set depends on people being rational and having access to all available information," says David Tuckett of the Psychoanalysis Unit at University College London.

"This way of looking at things is almost completely wrong," he said. "Markets are operated by human beings."

Investigators into the theories of behavioural or emotional finance say conscious decisions are only the surface of a river with deep and powerful undercurrents.


http://news.yahoo.com/s/afp/20080919/bs_afp/financesciencepsychology

My wife and I have been saying this for years. But then again we both have psych degrees so we're probably a little biased. Thanks for posting.

He could get pretty 'emotional' watching Bloomberg.

"But research in animals suggests that, over the long term, high doses of the hormone impair judgment and encourage excessive risks."

Sounds like a gambling addiction to me.

I wonder if there are stats on R to D ratio on the market floor? Of investors?

I've been following the markets since I was a young teenager (yeah, I was a weird kid). I've followed it, not with concern for any investments, but out of fascination that I live in a society which allows something so flagrantly bizarre and outrageous to determine it's well-being. An alien anthropologist, after landing his/her/it's UFO near any of the stock or commodity markets of this world, would quickly determine this planet to be devoid of intelligent life.