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