The anxiety stock market investors feel about the pandemic in the markets is not perfectly logical, but it is quite real

NEW HAVEN, Conn. — We are feeling the anxiety effects of not one pandemic but two. First, there is the COVID-19 pandemic, which makes us anxious because we, or people we love, anywhere in the world, might soon become gravely ill and even die. And, second, there is a pandemic of anxiety about the economic consequences of the first.Follow the latest news on the coronavirus on MarketWatch.

The ‘affect heuristic’ Many people seem to assume that the financial anxiety is nothing more than a direct byproduct of the COVID-19 crisis — a perfectly logical reaction to the disease pandemic. In a joint paper with William Goetzmann and Dasol Kim, we found that nearby earthquakes affect people’s judgment of the probability of a 1929- or 1987-size stock-market crash. If there was a substantial earthquake centering within 30 miles within the previous 30 days, respondents’ assessment of the probability of a crash was significantly higher. That is the affect heuristic at work.

Regret and fear Observing successive decreases in stock prices creates a powerful feeling of regret for those who have not sold, together with a fear that one might sell at the bottom. This regret and fear prime people’s interest in both pandemic narratives. Where the market goes from there depends on their nature and evolution.

Another reason is that epidemiology was only in its infancy then. Outbreaks were not as forecastable, and the public did not fully believe experts’ advice, with people’s adherence to social-distancing measures “sloppy.”

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