They then become “excessively” averse to uncertainty surrounding the future prospects of financial institutions. That is, they make decisions based on the “worst possible case scenario” and try to minimize the losses they would incur in this worst possible case 2 .
Their valuation of these financial institutions thereby turns out to be “excessively” pessimistic, and they become very sensitive to any news that supposedly has some bearing on the worst possible case scenario. Moreover, they tend to “wait and see,” until they feel more confident about the valuation of troubled assets.