A MASS PSYCHOLOGICAL PERSPECTIVE ON FINANCIAL MARKETS

Abstract

Numerous research works indicate that the cycle of boom and crisis can be regarded as a natural element in financial market history. On the other hand, there is a rich discussion among practitioners and academics on the origins of the recent global economic and financial crisis, which led the world into the deepest and most severe downturn since the Great Depression in the 1930s. An explanation solely based on the collapse of the U.S. housing bubble and its effects seems far too short-sighted. In addition to economic elucidations and rationalizations, there are also behavioral and socio-economic explanations, which take into account the powerful social and psychological forces at work in financial markets. This article approaches the discussion from a mass psychological perspective. Starting from the shortcomings of mainstream economic approaches in predicting market trends and their underlying trading behavior realistically, the paper elucidates postulated mechanisms behind mass phenomena and provides a concise review of literature on collective dynamics in financial markets. We then delineate previous research on the distinction between mass phenomena and attempt to transfer this theoretical framework to financial markets. Consequently the final section discusses directions for future research to extend the foundations of the theoretical frame of reference.