LONDON (BLOOMBERG) – Researchers at the Massachusetts Institute of Technology in the United States are diving into the demographics of people that panic sell stocks during a market crash.
Investors who are male, over the age of 45, married or consider themselves as having “excellent investment experience” are more likely to “freak out” and dump their portfolio during a downturn, according to a paper published last month that analysed more than 600,000 brokerage accounts.
The researchers say their work can be used to create predictive models, which would help identify individuals at risk of panic selling.
“Financial advisers have long advised their clients to stay calm and weather any passing financial storm in their portfolios,” wrote Daniel Elkind, Kathryn Kaminski, Andrew Lo and colleagues. “Despite this, a percentage of investors tend to freak out and sell off a large portion of their risky assets.”
The extreme emotional swings of being a stock market investor has long fascinated behavioral scientists. While the MIT study didn’t explore why exactly investors panic sell, the intense fear and desire to give up and get out of the market is well-known to any trader.
Countless studies have shown that people are better off staying put in a broad diversified portfolio, yet the promise of big riches and the terror of losing it all continues to drive frenetic trading patterns.
In the study, the researchers defined a panic sale as a plunge of 90 per cent of a household account’s equity assets over the course of one month, of which 50 per cent or more is due to trades.
“Panic sales are not random events,” the researchers wrote, saying its possible to identify clear trends in the data. They found that specific types of investors, such as those with less than US$20,000 (S$27,000) in their portfolio, also tend to liquidate more often.
“Subtle patterns in portfolio history, past market movements, and demographic profile can be exploited by deep neural networks to accurately predict if an investor will panic sell in the near future,” they added.