Stock markets around the world have suffered significant and historical levels of damage this week due to the rapid spread of COVID-19 around the world.
Market volatility led to the largest one-day drop since 1987, when 10.87 percent were erased from the value of the FTSE 100.
Cass professor of organizational behavior, Andre Spicer, explains that this extremely unstable behavior of the markets is caused not only by supply and demand issues:
“Health care epidemics and pandemics obviously hit markets heavily through economic fundamentals, but they can also greatly influence investor psychology.”
“We know that the demand for many products is declining in a highly contagious environment, as people do not consume products and services, such as travel or entertainment. Their supply also decreases when people fall ill or are forced to stay at home to take care of others, so the overall labor force and, consequently, the level of production decreases.
“It’s also worth considering that epidemics can have psychological impact in the markets for several reasons.
“First, they can distract people working in financial marketsThis means that they make more mistakes in forecasting crises. When these people or their loved ones are sick, their minds are likely to be somewhere else, and this can influence decisions and predictions about future prices.
“Secondly, when people think that the levels of pathogenic microorganisms are high and there is a higher risk to their health, they tend to become more conservative, less sociable, less innovative and compatible with the authorities. This means that people are likely to get rid of everything that they will perceive as a risky bet and run to a safe place, again hampering their judgment.
“Thirdly, traders begin to respond when an epidemic reaches its threshold. For example, we know that when flu gets into areas where global trading is located, such as in London and New York, trading activity tends to decrease as people become ill
“Finally, when large movements occur in the markets, traders tend to experience stress. Under stress, people are more likely to rely on various cognitive distortions, such as a herd or a tendency to lose, rather than a more rational analysis of their options. ”
City University of London
Measuring the psychological impact of a health pandemic on stock markets (2020, March 16)
restored March 16, 2020
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