Why Do Certain World Events Spark Totally Irrational Behaviour?

I recently read an article about a man who liquidated his entire investment portfolio in 2008, just after Lehman Brothers collapsed.  He was convinced this was the end of capitalism and that currency would be worthless.  To protect himself he converted everything into gold.

While I can understand the fear that drives someone to sell their holdings when the value of their stocks is rapidly declining, I fail to see why some people perceive that certain world events would possibly put them into financial danger with no hope for the future.

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I witnessed completely irrational behavior (to me, anyway) on two occasions.

Quebec referendum

On October 30, 1995 the separatist government of the province of Quebec – the Parti Quebecois – held a referendum to ask voters in Quebec whether they should secede from Canada to become an independent state.

Several days previously, a customer of the bank I worked in, afraid of a “yes” vote, cashed in all his holdings and purchased gold at around US$400 per ounce.  He probably would have made out like a bandit if he would have held on to the gold, but instead, he sold it at a loss a few months later.

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Y2K

The late months of 1999 had everyone in a panic.  People thought that all the computers in the world would crash the instant the year 2000 began.

TV infomercials sold millions of gadgets that you could attach to your kitchen appliances so that your toaster or coffee pot wouldn’t implode on January 1st.  Canadian Tire sold out of generators before fall.

The media were in a frenzy of predicting doomsday scenarios and let’s face it, people were worried.

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In late December a customer of ours liquidated everything he had, purchased a bank draft for the total amount (including what was in his chequing and savings accounts), and placed the draft in his safety deposit box.

The end of the world

According to the ancient Mayan calendar, our world will end in December of 2012.  The media loves a disaster story, and no doubt will soon be interviewing the doom and gloom experts and reporting on every perceived change in climate and the environment with a “chicken little” fanaticism.

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Will people again start to panic, convinced of the impending Armageddon?  Will they attempt to protect their families by converting all their assets into gold?  Will they rationalize their actions and consider them to be perfectly reasonable?

Maybe I’m just a fatalist, but for me it will just be business as usual.  What about you?


8 Responses to Why Do Certain World Events Spark Totally Irrational Behaviour?

  1. I am not at all sure people normally behave rationally. Therefore it may well be the irrationality you notice at those times is also all around all the rest of the time – maybe you just don’t notice as much. How about all those crazy people taking out mortgages they couldn’t afford. Or how about people failing to save for retirement. Or how about people maxing out their credit card and just going and getting another one… The craziness seems to pretty much always be here.

    • Boomer says:

      @John: I think these are really two different types of behaviour. The people you mention are not concerned about their future probably because it seems too far away to think about. Also, more people than you would think expect to win the lottery and think that will set them up for life.
      The people I was talking about are trying to control future events that are perceived to be dangerous to their financial health.
      Both types are irrational.
      We need a balance of paying for todays needs and wants and preparing for the future while being flexible to any changes along the way.

  2. People are always looking for something to rationalize their crazy behaviour. That’s my theory :) They were going to pull out the crazy before, but the events help them do it with an excuse.

    Or, everyone is just a conspiracy theororist.

  3. krantcents says:

    I tend to be very skeptical of these kinds of predictions. I will continue doing all the normal things without panicing.

  4. The Mayan calendar was never finished because the Spanish came in and eradicated them! The sun will continue to rise the next day just like any other. Although, if you can short the market near these “catastrophic dates” it could work out in your benefit if you’re a risk taker…

  5. sr says:

    People walk around in a hypnotic state most of the time. They are thinking other thoughts, a million miles away. They are not paying attention to their goals and dreams, what is important to them, where our current behaviours are headed, or the world around them at the moment. A goal of endless growth (cancer) instead of equilibrium in population and consumption, and the dismantling of protection for our ecosystems in exchange for record profits for mining, oil and gas, are more evidence of this. As for me, I think that my money is better of in real businesses on a small level right now than it is ‘invested’.

  6. What do you do? You double down and follow in Buffet’s foot steps. WWBD?!

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