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The Fear Factor
What Happens When Fear Grips Wall Street
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This book engages the reader in a fascinating discussion of the role played by fear in financial market panics. Professor Colin Read demonstrates, in easy-to-understand terms, that rising market fear portends to major financial declines. He discusses the science and the economics of fear and shows that the financial market has learned how to capitalize on investor or economic fear. Professor Read devises a measure of fear, called the panic index, and shows how this panic index is closely correlated to market volatility, the decline of returns for small investors and the rising profits in the financial industry. He concludes by offering a series of recommendations that can strengthen financial markets and leave them less prone to manipulation. Throughout the book, readers are provided with the necessary economic tools to enable them to understand the current market turmoil, and the author makes the case for the value of an economically literate society.
Introduction
PART I: THE NATURE OF RISK
The Biology and Psychology of Fear
An Economic Definition of Fear and Risk
PART II: THE SUPPLY AND DEMAND OF LOANABLE FUNDS
The Demand Side
The Supply Side
Balance of Capital
PART III: MEASUREMENT OF RISK
The Risk Premium - How Risk Affects Expected Returns
The Fear Premium
The Demographics of Risk and Fear
The Microeconomics of Risk Aversion
PART IV: THE PROBLEMS WITH RISK
Moral Hazard
Privatized Gains and Socialized Losses
Adverse Selection and Imperfect Information
Risk, Uncertainty, Fear, and Gambling
PART V: RISK AND THE MARKET
Market Volatility and Returns
Fear, Panic, and Market Returns
The Fear Factor
PART VI: A HISTORY OF PANICS
A Brief History of the Fear Gripped Market
The Roaring Twenties and the Great Crash
The Depression-Gripped Economy
Along Comes Keynes
PART VII: COORDINATION FAILURES
The Market for Lemmings, or Tale of Two Cultures
The Role of Machines and Programmed Trading
The Ratings Agencies - More Perfect Information?
PART VIII: SOCIAL RESPONSIBILITY AS AN ANTIDOTE TO FEAR
Where Were the Regulators
Ethics and Social Responsibility
Wall Street, Main Street, and the Social Contract
PART IX: INSTITUTIONS THE AMELIORATE OR AMPLIFY FEAR
The Media as an Antidote to Fear
Politics That Fan the Flames of Fear
Is There More to Fear than Fear Itself?
PART X: SOLUTIONS AND CONCLUSIONS
Economic Leadership as an Antidote to Fear
A Dozen Prescriptions to Take Back the Markets
Conclusions
Glossary
Index
Endnotes
COLIN READ is Professor of Economics and Finance at SUNY College at Plattsburgh, and a columnist for the Plattsburgh New York Press Republican newspaper. He has taught economics and finance for 25 years. His recent books include Global Financial Meltdown: How We Can Avoid the Next Economic Crisis and International Taxation Handbook (edited with G. Gregoriou). He has written dozens of papers on market failure, volatility, and housing markets, writes a monthly column in a business trade journal, and appears monthly on a local PBS television show to discuss the regional and national economy.
Description
This book engages the reader in a fascinating discussion of the role played by fear in financial market panics. Professor Colin Read demonstrates, in easy-to-understand terms, that rising market fear portends to major financial declines. He discusses the science and the economics of fear and shows that the financial market has learned how to capitalize on investor or economic fear. Professor Read devises a measure of fear, called the panic index, and shows how this panic index is closely correlated to market volatility, the decline of returns for small investors and the rising profits in the financial industry. He concludes by offering a series of recommendations that can strengthen financial markets and leave them less prone to manipulation. Throughout the book, readers are provided with the necessary economic tools to enable them to understand the current market turmoil, and the author makes the case for the value of an economically literate society.
Contents
Introduction
PART I: THE NATURE OF RISK
The Biology and Psychology of Fear
An Economic Definition of Fear and Risk
PART II: THE SUPPLY AND DEMAND OF LOANABLE FUNDS
The Demand Side
The Supply Side
Balance of Capital
PART III: MEASUREMENT OF RISK
The Risk Premium - How Risk Affects Expected Returns
The Fear Premium
The Demographics of Risk and Fear
The Microeconomics of Risk Aversion
PART IV: THE PROBLEMS WITH RISK
Moral Hazard
Privatized Gains and Socialized Losses
Adverse Selection and Imperfect Information
Risk, Uncertainty, Fear, and Gambling
PART V: RISK AND THE MARKET
Market Volatility and Returns
Fear, Panic, and Market Returns
The Fear Factor
PART VI: A HISTORY OF PANICS
A Brief History of the Fear Gripped Market
The Roaring Twenties and the Great Crash
The Depression-Gripped Economy
Along Comes Keynes
PART VII: COORDINATION FAILURES
The Market for Lemmings, or Tale of Two Cultures
The Role of Machines and Programmed Trading
The Ratings Agencies - More Perfect Information?
PART VIII: SOCIAL RESPONSIBILITY AS AN ANTIDOTE TO FEAR
Where Were the Regulators
Ethics and Social Responsibility
Wall Street, Main Street, and the Social Contract
PART IX: INSTITUTIONS THE AMELIORATE OR AMPLIFY FEAR
The Media as an Antidote to Fear
Politics That Fan the Flames of Fear
Is There More to Fear than Fear Itself?
PART X: SOLUTIONS AND CONCLUSIONS
Economic Leadership as an Antidote to Fear
A Dozen Prescriptions to Take Back the Markets
Conclusions
Glossary
Index
Endnotes
Authors
COLIN READ is Professor of Economics and Finance at SUNY College at Plattsburgh, and a columnist for the Plattsburgh New York Press Republican newspaper. He has taught economics and finance for 25 years. His recent books include Global Financial Meltdown: How We Can Avoid the Next Economic Crisis and International Taxation Handbook (edited with G. Gregoriou). He has written dozens of papers on market failure, volatility, and housing markets, writes a monthly column in a business trade journal, and appears monthly on a local PBS television show to discuss the regional and national economy.
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