If the recent collapse of the world stock and securities exchanges has investors confused, a small community of experts who study the behavorial peculiarities of financial markets have an easy word for it. It's one of the most common mental health crises of the human species--panic.
But even the experts are having to redefine the term these days. For the first time, they are seeing panic on an instantaneous, global level instead of just in isolated locations.
"I believe we are definitely experiencing (the beginnings of) a panic," said Neil Smelser, a UC Berkeley sociology professor and one of the best-known analysts of human behavior in financial markets. The two sharp drops of the Dow Jones Industrial Average on successive Mondays, combined with the huge volumes of shares traded, indicate a panic-like attempt to escape while escape is still thought possible, he said.
"Panic really ought to be distinguished from fear," said Smelser, because panic has an extra component:
"Panic occurs when it looks as though the door is closing, but it is not yet closed and you have got to get out in time or you're going, in the case of a theater fire, to be burned to death or, in the case of financial market, you're going to get wiped out."
Search for Scapegoats
It is also characterized, he said, by the frantic search for scapegoats--and brokers appear to be absorbing much of this so far.
In individuals, panic is technically a neurosis, a disorder that begins with a sudden feeling of impending doom and often has physiologic manifestations. They can include a racing heartbeat and hyperventilation that is sometimes so acute the victim must breathe into a paper bag to reinfuse carbon dioxide into the bloodstream.
In the stock market, the panic began Friday, Oct. 16, when American stocks plunged. Investors, seeing the prospect of at least limiting some losses, rushed to sell. The sell frenzy spread globally to other markets, triggering the perception of immense danger.
According to behavioral experts, the fact that the danger appeared to be worldwide increased the fear of imminent catastrophe.
In fact, an Australian psychologist and expert on panic disorders in economic collapse believes that the nature of today's global financial markets necessitates a new perception of panic as a psychiatric emergency that can occur simultaneously in widely separated places.
With stock markets gyrating wildly the world over, "the theater of panic has become the whole global village," said researcher Leon Mann, of Flinders University of South Australia. That in turn, he said, makes it impossible to know which way to run to escape, which heightens the panic reaction.
Smelser thinks the activities of institutional investors have the potential to temper panic behavior today because, he said, institutions act with less irrationality than individuals and institutional managers are better informed than small investors.
Smelser hopes, for that reason, that the panic of 1987 will be more restrained than the reaction that followed the market crash of 1929.
"I would not call this full (catastrophic) panic yet," he said. "I would call it big jitters that could turn into a full-fledged panic. Another day like Monday (Oct. 19, when the Dow Jones average dropped 508 points) or a really big note of bad news about the economy, that could trigger it."
To psychiatric experts, panic is a fascinating human affliction. "It is distinct primarily because of its disorganizing potential," said Dr. Daniel Freedman, a professor of psychiatry at UCLA and editor of the Archives of General Psychiatry, a leading journal. "Panic is characterized by reactions of fright and anger, combined with unfocused, disorganized responses. The fact is that all of us have the capacity, if we're lucky, to become anxious and to be vigilant to danger."
And psychiatrists view the treatment of panic in individuals as comparatively simple. The patient, said Freedman, is brought as quickly as possible into physical surroundings of quiet and calm, is reassured and given orienting information to reestablish his or her link with a familiar behavior state.
"You tell them, 'Look, you're upset at the moment; you're not thinking clearly. But we're here and things are all right and it's not a time to take any action. It's a time to cool it.' ," Freedman said.
But financial panic, because of the nature of contemporary financial markets, is difficult to either contain or treat in such clinically accepted ways, according to both Freedman and Mann.
"You have this situation taking shape in a number of individual countries," said Mann, noting that a unique feature of this month's market collapse has been the way securities exchanges all over the world have been affected, with each new national market decline feeding the international situation.