Wall Street's high stress, high risk environment contributes to risky behaviour in financial experts' lives [GALLO/GETTY]
Thank you, Wikipedia, for this definition:
"Irrationality is cognition, thinking, talking or acting without inclusion of rationality. It is more specifically described as an action or opinion given through inadequate reasoning, emotional distress, or cognitive deficiency. The term is used, usually pejoratively, to describe thinking and actions that are, or appear to be, less useful or more illogical than other more rational alternatives."
And what about the term "Market Psychology"? It is defined by Investopedia this way:
"The overall sentiment or feeling that the market is experiencing at any particular time. Greed, fear, expectations and circumstances are all factors that contribute to the group's overall investing mentality of sentiment."
Q: What do we have when we put the two together?
A: The current madness and market mayhem.
S&P's credit rating downgrade is being blamed for the market panic, even though the business media expected a downgrade and initially minimized its potential impact. The rating agency blamed the government's failure to deal with the debt -- including the stalemate in Congress -- as reasons for the downgrade.
The Republicans predictably blamed Obama and the Democrats went after the Tea Party as the culprits behind the market plunge. But then, investors, who at first denied that a downgrade would be significant, overreacted to it by pumping more money into government treasuries, adding to the government debt.
The Comedy Channel's Jon Stewart's sensible reaction: "Are you kidding me?"
Does this make any sense?
We are taught to think of businessmen and their minions as absolute worshippers of objective truth as they allegedly practice "due diligence" to confirm underlying facts and ensure that their decisions are based on research and thoughtful decisions.
That's what we are taught -- but is that what they do?
In fact, the "smartest guys in the room," as the Enronians were called, proved to be the dumbest, buying into a warped worldview, and then, believing their own hype leading to decisions that brought the house down.
And that's what happens again and again, over and over, as panic seizes The Street, followed by a herd of decision makers making bad decisions.
Paul Farrell has written about this phenomenon on Marketwatch: