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Runaway Stress Attacks Financial Markets

High anxiety produced the equivalent of a panic attack in the world’s financial markets last Thursday. It was a day reminiscent of the high anxiety, high stress situation in the fall of 2008 when the markets lost almost half of their value in a few weeks.

On Thursday, from the Hang Seng to the Tadawul, from the DAX to Wall Street, fear gripped traders. On Wall Street, shares plunged by nearly 10% of their value and then regained it almost all back by closing time. Millions of dollars were lost and gained in minutes. Automatic halts on trading by computerized safeguards prevented a complete meltdown.

For at least “a discrete period” (i) of a few hours on Thursday, there was “a sudden onset of intense apprehension, fearfulness, or terror, often associated with feelings of impending doom.” (ii)

Among individual traders, “symptoms such as shortness of breath, palpitations, chest pain or discomfort, choking or smothering sensations, and fear of ‘going crazy’ or losing control” (iii) appeared and disappeared throughout the day.

This appeared to be the type of panic attack that was “situationally bound (cued)… occurring on exposure to or in anticipation of the situational cue or trigger.” (iv) The situational cue on Thursday was a real or perceived threat to the world economy by the crisis of confidence in Greece’s ability to meet the obligations of its national debt.

When the panic attack was over on Friday, financial analysts and the rest of us were left to wonder if” “the increased global anxiety threatens to slow the recovery in the United States, where job growth has finally picked up after the deepest recession since the Great Depression.” And if “it could also inhibit consumer spending as stock portfolios shrink and loans are harder to come by.”

For anxiety, stress and panic attacks to be linked to allegedly rational financial evaluations and transactions is nothing new.

The notorious tug of war between quantitative economists and those who believe that financial decisions are to a large extent irrational, continues unabated.

An April 2010 NOVA special on PBS, Mind Over Money asked a very straightforward question: Can markets be rational when humans aren’t?

Thursday’s events would seem to indicate, once again, that mathematically-bound, high-intellect frontal lobe activities such as financial markets are vulnerable to sudden irrationality.

Just like the rest of us.

(i), (ii), (iii), (iv) American Psychiatric Association. (2000). Diagnostic and statistical manual of mental disorders – Text revision (4th ed.). Arlington, VA: American Psychiatric Association.