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Dr. Freud, Meet Dow Jones

Washington Post
By Jay Mathews
Washington Post Staff Writer

What Moves Stocks Piques the Interest of Behavioral Scientists

The key, said Los Angeles psychologist James W. Gottfurcht, president of a company that teaches investing psychology, is a concept known as "social contagion."  The pre-human primates who once lived on the African grasslands learned that if everyone else in the pack started running for the trees, they ought to run also, or risk becoming a saber-toothed tiger's lunch.            

Thus did the markets created by less hairy apes in modern times adopt patterns of small, jittery ups and downs punctuated by occasional, and often inexplicable, buying and selling panics.  A large market movement "will gather its own momentum," Gottfurcht said.  "There will be a news event and then some of the big boys may do something and when it reaches a certain threshold it draws the herd instinct ... and people start buying and selling, not for rational reasons but for emotional and biological reasons." A market downturn - such as the one the analysts have been anticipating for months now - can feed on itself in terrifying ways, for "loss is the most traumatic thing for a person to deal with," Gottfurcht said.  "The last stage of a crash is a panic.  It escalates and people want out at any price."           

In his seminars in West Los Angeles, Gottfurcht cites historical examples of social contagion.  There was the Dutch tulip bulb frenzy in the late 17th century.  In the early 1950s, Seattle encountered its windshield pitting epidemic, in which thousands of reports of mysterious scratches and small depressions on local windshields deluged police, with some suggestions of extraterrestrial sabotage, until it was pointed out that the wear-and-tear was natural in the Pacific Northwest.

Gottfurcht said he believes in contrarian analysis, but warns the neophytes in his seminars not to use it unwisely.  "You can be positioned against the majority, but you can't be against it for arbitrary reasons.  You have to have a logical, accurate perspective on the situation."

He confronted social contagion in a personal way just before the Persian Gulf War, when the stock market had declined severely and violent conflict in the Middle East seemed imminent.  

"That was a phenomenal buying opportunity because all this had been discounted.  The market had had all this time to be afraid," he said.

The war, he thought, was not going to be anything like Vietnam.  It had popular support and was being waged on very different terrain.  Having studied fear and helped people work their way through divorce and job loss, he could handle this kind of panic.  "I made an investment," he said, and when the market leaped upward in relief at the allied victory, "I made a quick profit." 

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