Page last updated at 08:32 GMT, Friday, 3 October 2008 09:32 UK

'Illusions driving market havoc'

City trader
City traders may be seeing patterns that 'aren't really there'

The mind naturally creates illusions and superstitions at times of stress - and this could be adding to the global financial crisis, say scientists.

US researchers say feeling "out of control" makes us more likely to misinterpret information as we search for signs of order.

The study in the journal Science found investment decisions of volunteers were adversely affected by these feelings.

Simple psychological techniques might improve their performance, they said.

These dealers are supposed to be rational - but they're almost certainly not
Professor Cary Cooper
Lancaster University

The researchers, from the University of Texas and Northwestern University in Evanston, Illinois, believe that humans cope with feeling out of control by trying to impose order subconsciously - even in situations where there is none.

At a simple level, they demonstrated the principle by asking volunteers to look for images embedded in "snowy pictures".

Those whose feelings of control had earlier been undermined were more likely to claim to have seen an image, even where none existed.

However, the researchers believe that other kinds of illusion, from conspiracy theories to superstitions, stem from the same basic subconscious problem, and that it may be contributing to the current havoc on the world's financial markets.

Frightening headline

In another experiment, people were given one of two headlines to read.

The first said "Rough seas ahead for investors", while the other said "Smooth sailing ahead for investors".

They then were given statements about two different companies, with the first having 16 positive comments and eight negative, the second eight positive and four negative.

Even though both companies had the same ratio of positive to negative, when given a choice of which company, if any, to invest in, those given the "rough seas" message were far less likely to invest in the second company.

When asked to recall the positive and negative information, again, in the more volatile market, the investors were far more likely to overestimate the amount of negative information about the second company.

This meant, said the researchers, that the volunteers whose feelings of control had been undermined formed an "illusory correlation" linking negative feelings to the company with fewest comments, and made their investment decisions on the back of it.

'Lucky shirt'

Professor Adam Galinsky, one of the authors, said that professional market dealers were almost certainly not immune from this, and that it could affect the strength of their decisions.

Conspiracy theories which sprang up as the $700bn US bailout plan was negotiated were also likely to have stemmed from this mindset, he said.

"I imagine that there are a lot of dealers who are wearing a 'lucky shirt' at the moment, or walking a certain way to work in the hope that this will improve their fortunes."

When psychological therapy techniques were used to make them feel secure, these effects disappeared, the researchers reported.

"There is no point going up to them and telling them they are wrong, we need to make them feel more secure," said Professor Galinsky.

Professor Cary Cooper, a researcher on stress in the workplace at Lancaster University, said that rational decisions were unlikely in such a pressured environment.

"These dealers are supposed to be rational - but they're almost certainly not. If they feel out of control they will be not be looking in the right way at the information that is coming to them."

Getting bankers to act responsibly
01 Oct 08 |  Business

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