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Anticipating Economic Market Crises Using Measures of Collective Panic
Dion Harmon1, Marco Lagi1, Marcus A M de Aguiar2
1New England Complex Systems Institute, Cambridge, MA, United States of America.
Plos One
|July 18, 2015
Summary
Market mimicry, a sign of uncertainty, often precedes economic panics. High levels of this behavior can indicate a potential for self-organized crises, independent of external news.
Area of Science:
- Behavioral economics
- Financial markets analysis
- Complexity science
Background:
- Predicting panic is crucial in economics and behavioral studies.
- Recent financial crises highlight the need to understand panic dynamics.
- Panic can stem from external threats or internal nervousness.
Purpose of the Study:
- To investigate the behavioral precursors to economic panics.
- To identify reliable indicators of potential market crises.
- To differentiate between externally triggered and internally generated panic.
Main Methods:
- Analysis of market data to quantify levels of 'market mimicry'.
- Correlation of mimicry periods with subsequent large-scale market events.
- Assessment of the influence of external news versus internal behavior.
Main Results:
- Extended periods of high market mimicry preceded major economic crises.
- Market mimicry serves as direct evidence of uncertainty and nervousness.
- The influence of external news was found to be comparatively weak during these periods.
Conclusions:
- High levels of market mimicry are a general indicator of potential self-organized crises.
- Market mimicry reflects underlying uncertainty and nervousness driving panic.
- Understanding mimicry dynamics is key to predicting and mitigating financial instability.
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