Panic Experts Take Stock of the Markets

Times Staff Writer

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.

‘Big Jitters’

“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.

Unique Feature

“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.

“Structurally, when you look at a theater in which there is a fire, if everyone was to cooperate and file out in a nice, orderly way, everyone would be saved,” said Mann in a telephone interview from Adelaide. “What happens with the phenomenon of 1929 is that you’re looking at a particular country (of origin, the United States).

“But in 1987, you’re looking at the entire globe. People watch first-hand on television. I guess this is the lesson for us in the future. What happens in one part of the globe can (in the sense of clinical manifestations of panic) immediately be felt all over the world.”


“The community would be better off,” he added, “if everyone were able to cooperate and leave their stocks and share investments alone. But some withdraw. That affects the holdings of others and, of course, they then have no option except to withdraw and it makes it even worse for people who are slow to do that. You have a classic game.”

The potential for panic--especially as it applies to behavior in financial crises--involves a variety of unique circumstances, Smelser said. But the possibility of escape is key.

“You don’t get panic among miners trapped in a mine with no way to escape. They are resigned to what is happening,” Smelser said. “You don’t get panic among troops surrounded with nowhere to go, but you do get panic on the battlefield when there is a possible opening (to safety) and someone starts running or yells something like, ‘They’re encircling us!’ ”

‘Charge Toward Liquidity’

Likewise in financial panic situations, Smelser said, the phenomenon is at its worst when there is a perception that escape is still possible. “You charge toward liquidity on the grounds that if you don’t get out now, you’re going to lose more later.”

Controlling that panic, he added, depends on the continuing ability of political and market leaders to provide what psychiatrists call “buffers” for the situation.

Recent buffers, for example, have been the calming statements and explanations for such developments as the decision to shut down the New York Stock Exchange two hours early every day this week. So far, the experts agree, they seem to have been handled effectively in terms of public perception.


Episodes like the one Monday in Miami in which a distraught stock investor burst into the offices of Merrill Lynch with a gun, shooting and killing a manager and wounding another broker before fatally shooting himself, should be viewed as aberrations as the panic plays itself out, Smelser said.

But Stanley Schacter, a Columbia University psychologist and an expert on the human behavior component of financial markets, said it is difficult to explain in rational terms the necessarily irrational behavior that occurs in financial panic.

“We (psychologists) have bigger words,” he said, “but we are no more knowledgeable about what explains human behavior in this way than any man of common sense.”