Thursday, October 23, 2008

Fear is the new mindset in the irrational world of finance

""Three great forces rule the world: stupidity, fear and greed" - Albert Einstein.

As fear takes over from greed in the financial world, markets are gyrating wildly with no apparent end in sight. Are stock traders and investors losing their nerve as the world heads into what many fear will be a deep and prolonged recession? Or are the violent movements an accurate assessment of the current plight of the global economy?

Markets can be slow to react to information that is unexpected and unwelcome, as was the case with the numerous warning signals that pointed to the US sub-prime crisis.

"Most in the financial world were like deer in headlights," says Professor Hersh Shefrin, who teaches behavioural finance at Santa Clara University in California and the Amsterdam Institute of Finance.

He classifies the lack of reaction over the past three years as "irrational behaviour" on the part of traders. And now we are seeing an equally irrational overreaction, he believes: "What we have now is the polar opposite, where the reaction is absolutely frantic. The underlying fundamentals on a day-to-day basis are not changing anything like what's happening in terms of the equity markets, which are bouncing around from day to day."

Piling on the stress are fears over job security - tens of thousands of bankers have lost their jobs as major firms merge or, in the case of Lehman Brothers, collapse. Goldman Sachs is reportedly poised to axe one in 10 of its workforce - more than 3,000 people.

Dr Alden Cass, a clinical psychologist who counsels Wall Street bankers and is the author of Bullish Thinking, says he has seen an increase in the number of new clients over the past month and has cut his prices to make his therapy sessions more affordable – his hourly rate now starts at $225, rather than $300.

"There's a sense of powerlessness. Markets are extremely volatile and irrational – all of a sudden people are dealing with a different beast," Cass said."



10 comments:

Anonymous said...

....irrational exuberance...90s


....fear, greed, distrust...

K Curtis said...

We are a society of quick fixes:
Do a search for diet books on amazon and you'll find thousands...
most of which claim it's easy to lose weight almost immediately.

It's a constant whipsaw that I don't think will ever change and that's why you have to believe in the law of averages.

KCurtis
Free Leads

Anonymous said...

Hedge funds work because of monetary incentives and checks and balances on managers that closely align their interests with clients. The often cited "heads I win, tails you lose" compensation scheme is a myth. The possibility of investors redeeming for poor performance, high water marks, no lockups and the principals' wealth at risk assures clients of shared downside exposure and motivates managers to try to minimize drawdowns.

Anonymous said...

Buy a big mattress and stuff it with all the gold jewelry you can.

Anonymous said...

stop trying to fear monger asshole

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Anonymous said...

Flegm

Anonymous said...

sun rises east to west.


not west to east.

Anonymous said...

worse than the great depression