The Problems with Panic

January 28, 2021


Globally recognised expert in applied decision science, behavioural finance, and financial wellbeing, as well as a specialist in both the theory and practice of risk profiling. He started the banking world’s first behavioural finance team as Head of Behavioural-Quant Finance at Barclays, which he built and led for a decade from 2006.

In his book, 'The Antidote: Happiness for People Who Can't Stand Positive Thinking', Oliver Burkeman describes a study that prescribed relaxation tapes to patients suffering from panic disorders. It backfired. The tapes pumped hearts up, not calmed them down.

From forbidden fruit to bottled-up bereavement, you don't need a degree in Jungian psychology to know that the futility of enforced repression replicates well. Telling someone not to feel something is about as effective as telling them not to think of a polar bear. What have you just done?

The word 'panic' comes from the Greek God of Shepherds, Pan. Legend has it that while Pan was a pretty chilled out God when relaxing in the pasture playing his eponymous pipes, if abruptly awoken from a postprandial nap, he was so cranky that he ignited a 'sudden fear' – a 'panikos' – that caused nearby flocks to stampede in terror.

Cranky goat-like gods may not appear so much on the news these days, but underlying stories stick around longer than their symbols, as does our unceasing inability to learn their lessons. And every time panic pops back up, investments hit the headlines.

Why is panic so persistent, and what should investors do about it? Here are five reasons why, and one prescription:

1. Panic is emotional but we try to cure it with reason. Telling people not to panic usually makes them panic. It's been an apt 42 years since the publication of the Hitchhiker's Guide to the Galaxy, and the irony of its cover's message has lost none of its comic edge. Reminders that panic is historically unjustified, that volatility is the price of admission, and that stat about the average intra-year drop are not the medicine for infectious irrationality. It takes more than logic to loosen emotional limpets. Classical finance acts as if buying investments turns human into robots. Yet it does no such thing. Owning investments amplifies emotions, it doesn't erase them.

2. Panic is more easily prevented than cured, but prevention requires action that only being in need of a cure creates, so we don't move until it's too late. Once panic has taken hold, it's a hard grip to get out of. You don't cure being hugged by a bear, you stay away from the grizzly thing in the first place. But if taking boring behaviours on a regular basis with nothing but a vague notion of the compounding effect of habits and a faraway possibility of a problem for Future Us were enough to inspire action, we'd all have six-pack stomachs and seven-figure retirement accounts. Behaviours do not change themselves; if they did, they wouldn't need to change.

3. Panic is personal, but we treat it at the population level. Panic is driven by the actions of the flock, but it's experienced individually. We know what different stress responses are, but we don't know by demographic data, or even reliably by past actions who falls into which camp. Nor what triggers a response at all. To complicate things further, messages that may prevent one person from doing a dumb thing may inspire another to do so. Where one person builds stoic resources from frequent reassurances, another hears a patronising or irritating boy crying wolf. Where personalisation does happen, it's focused on portfolios not personalities. And then there are the mixed messages… We say investing is about the long-term and deliver quarterly reports. We say it's about individual goals, then report on collective benchmarks…

4. Panic is part of a perpetual cycle, but we treat it as a freak occurrence. Isn't it odd how we panic buy toilet paper, and panic sell shares… even when we need neither boxes of bog roll nor the liquidised value of the shares for the foreseeable future, and there's a flash sale on the shares? Greed-buying and panic-selling are the top and tail of the cycle of inevitably disastrous investor decisions. The whole point of a financial planning process is to break this cycle. Where plans fail, be it the alert and inspired future gym-goer of New Year's Eve turning into the tired and emotional duvet-hugger of New Year's Day, or the calm investor sitting with an adviser for an hour turning into the confused one reading the news six weeks later, is when the person making the plan thinks they're planning for them, when actually they're planning for some other idiot. An idiot that looks like them, but if they had a cool enough head to make a plan, they'd have a cool enough head not to need one.

5. Panic is a permanent possibility, but we treat it as a passing phase. Even if we avoid the monetary costs of panic, and are persuaded to sit tight, we may not avoid the mental ones. Maybe whatever doesn't kill us will make us stronger. Maybe we'll remember our resilience and how well it served us and draw on it more automatically next time. Or maybe next time what we'll remember is how horrid we felt and get out more quickly at the first sign of trouble. Maybe the recall of the panic is what will tip us over the edge into being persuaded to invest more money not in our portfolio but in our mate's property proposal. It's right there in our language: panic sets in, it doesn't pass by.

Because panic is all those things, we need a solution that is psychological, preventative, personal, perpetual, and planned for. Do not tell people how to behave. Predict how they're going to behave and plan appropriate preventative action.

We need behavioural profiling that guides advisers towards preventative prescriptions, and clients towards plans that deal with panic by steering away from idiosyncratic storms, not trying to rationally repress them when it's already too late.

For more on how to better manage portfolio responses to market falls with a properly quantified and dynamic risk capacity calculation, see Should a Change in Market Values Mean a Change in Risk?

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