The London Paper – 10 Oct 2008
‘The only thing we have to fear is fear itself’. When President Roosevelt voiced those immortal words at the height of the 1930’s depression he hit the nail on the head. Unfortunately, fear is pretty damn frightening. It’s frightening because it causes people to do irrational things and soon snowballs into mass hysteria. Fear of lending money to someone and not getting it back is what’s at the heart of the credit crunch.
Blind fear also explains ‘Meltdown Monday’ and the other days of stock market madness we’ve experienced over the last few weeks. There doesn’t seem to be anything particularly rational about the indiscriminate selling and herd mentality that have plagued share prices. What we essentially witnessed when countries’ stock markets fell by up to 20% on Monday is called ‘capitulation’ e.g. such total panic that even the bravest of the ‘bulls’ throws in the towel screaming ‘b*^locks, if you can’t beat ‘em join ‘em!’
It is now emotion and not logical analysis that is dictating everyone’s behaviour and this is because despite several millennia of ‘civilization’ we human beings are basically just monkeys whose frontal lobe mutated about two and half million years ago. Hence, we are hard-wired to blindly follow the crowd during times of uncertainty when information is scarce and threats imminent. That’s why we’re all abandoning logic and jumping off the cliff like a bunch of lemmings and why the Government had to step in on Wednesday to calm the sheer, unadulterated panic that had infected all markets.
The irony is that recently indiscriminate selling has been quite rational. If you know that shares are being traded by tetchy chimps whooping in the trees because there’s a big, bad lion roaming the jungle floor then you need to second guess what they’re going to do if you want to make the right trades. Unfortunately for us when illogical behaviour is de rigueur then it’s most profitable (and logical) to act illogically too.
Fear and greed and herd mentality dictate stock markets which, in turn, have a huge impact on our economy and society. Sadly this means that until humans become coldly logical (God forbid) or we find a more sensible financial system we will continue to have the kind of destabilizing booms and busts that causes us all to feel insecure about our future.
‘I never make predictions and I never will’ said Paul Gascoigne, and I’d usually subscribe to his beautifully contradictory statement. However, I’m gonna put my balls on the line here as I did a year and half ago when I said we’d have a nasty stock market crash. I think we’re reaching close to the bottom here. The darkest hour is just before the dawn and, although I know I’m going to regret saying this, surely it can’t get that much darker than now?