Dissecting A Crash

All students of trading are told, early on, that the psychological aspect is a major issue, that mental images and perceptions play a large role in the success or failure of our trading activities. 

The same is true of market crashes.

This is why observers refer to crashes, aside from statistical and financial events, as SOCIAL PHENOMENA as well.

An example of what they are referring to is what many people call the human phenomenon of the ’self-fulfilling prophecy.’

Here’s one example of how it can work:

A mass media or journalism leader makes a striking claim, over a large network device such as the internet and/or television.  Then many like-minded people, sharing the same philosophical, political or world view, repeat the statement and overhear it from others.  This ‘echo chamber’ effect amplifies the transmission of the idea. It is repeated again and again, verbally and electronically.

Often the repetition or ‘passing on’ is done with imposed exaggeration or other distortion that matches the repeater’s personal viewpoint.  He welcomes the idea because it’s a confirmation of what he believed from the start.

Finally, a large populous assumes that the original statement is true because ‘everyone’ says so.

This is what Robert Merton, 20^th century sociologist, in his book, Social Theory and Social Structure, referred to when he said that a self-fulfilling prophecy is, in the beginning, a FALSE perspective of a certain situation.  BUT, people believe him and change their behaviors to match it!  (He calls this portion of the phenomenon the ‘reign of error.’)  Eventually this new behavior makes the original concept come true.  Finally, the person who stated the original perspective, citing these people’s behaviors, claims it as proof that his statement, was, indeed, correct.

This is at least partially what has happened in our recent market crash.

A media person, with his own power or political agenda, makes a frightening assertion.  Like-minded folks accept it as confirmation of their owner personal fears and repeat it any number of times, behaving according to it and get it echoed from others of similar mentally, until it ‘catches ‘on’ and becomes ‘obvious’ true.

The moral of the story is this: Do you OWN thinking and listen, as little as possible, to media moguls.