Thursday, November 20, 2008


While a nominal level of fear is a necessary component of markets because it helps us avoid mistakes, outright panic can be devastating. A behavioral finance professor at Santa Clara University has even studied how panic creates a vicious cycle of irrational behavior. In his 2000 paper, Hersh Shefrin points out how panicked investors misread events, taking small threats as catastrophes that spur them to action. The end result? Investors sell out of valuable companies at low prices on an inflated sense of fear and uncertainty.

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