Predicting Panic

“The only thing to fear is fear itself,” proclaimed Franklin D. Roosevelt.  He condemned this fear as “nameless, unreasoning, unjustified terror.”  Speaking of the Great Depression in a speech to the nation, Roosevelt urged U.S. citizens to take action to change the economy.

Fear continues to affect the economy in this era, according to cutting edge analysts.  In fact, the results of fear, economically speaking, are downright predictable.

Using new statistical analysis tools of complexity theory, researchers at the New England Complex Systems Institute (NECSI) performed new research on predicting market crashes. “We have demonstrated mathematically that there is significant advance warning to provide a clear indicator of an impending [stock market] crash,” explained Professor Yaneer Bar-Yam, president of NECSI and principal investigator on the research.Does this finding empower everyone to work collectively to halt crashing markets?  Can recruiters anticipate changes in hiring practices based on watching collective optimism or jumpiness?

According to the press release from NECSI, the number of different stocks that move up or down together is an indicator of the mimicry within the market, how much investors look to one another for cues. When the mimicry is high, many stocks follow each other’s movements-a prime reason for panic to take hold. So you don’t worry when one of your clients stop hiring, but when every company you talk to expresses fear, it might be time to shake things up a bit – try a new industry or set of companies.

NECSI researchers show that this trend has been proven again and again.   A dramatic increase in market mimicry occurred during the entire year before each market crash of the past 25 years, including the recent financial crisis.