Menu
Share
Share this story
Close X
 
Switch to Desktop Site

Stock market plunges and soars. Is it acting irrationally?

Next Previous

Page 2 of 3

About these ads

But, at the same time, traders looking at charts of the stocks are nervous about buying them. “If you are a technical guy you are looking for signs the market is bottoming here,” says Mr. Weisbrod.

The volatility is also in large part because of a larger amount of angst than normal, says Emma Rasiel, an associate professor of economics at Duke University in Durham, N.C.

“The markets are trading more on psychology,” says Ms. Rasiel, director of Duke’s Financial Education Partnership. “People are scared by what is happening.”

One measure of volatility is the VIX, a futures exchange index, sometimes called “the fear index.” During normal times, it trades at around 20. Recently, it has soared to over 48.

“That means people are panicking,” says Rasiel, referring to the price level on the VIX.

Another measure of volatility is the large spread between the highs and lows for the trading session. In August, there have been six days where the high separated the low for the day by more than 400 points. In the two years between July 2009 and July 2011, there were three such days.

Rasiel says a major reason for the overreaction by the markets is sharp losses many people have experienced in their portfolios. According to Moody’s Analytics, the stock market has lost $3 trillion in value since the peak in late April.

The losses are resulting in emotional decisions. Rasiel says “behavioral economics” has found the extent to which people hurt from losses is twice the enjoyment they get from gains. “So, there is some major misery going on here,” she says.

At the same time, Coleman says the wide swings are partly the result of the cloudy economic situation.

Next Previous

Page:   1   |   2   |   3


Follow Stories Like This
Get the Monitor stories you care about delivered to your inbox.

Loading...