Market Psychology –

The once unthinkable, now unforgettable events of Sept. 11 shocked us beyond anything we had ever prepared ourselves for. Pundits of all sorts have been debating the consequences of the terrorist attacks on our lives and on the economy. What does that emotional shock mean for the mergers and acquisitions market and for deals in general?

It means a lot, actually. Anyone who wants proof can find it in the economic indicators immediately after the tragedy. Consumer confidence plunged. Layoffs soared. Venture capital investment stalled. The entire country came to an almost complete halt. And although it is slowly moving forward again, the truth is that until we all establish our own emotional stability, we’ll have trouble making effective, rational business judgments-particularly major investment and acquisition decisions.

Much of the discussion in the financial world about market psychology has come from market participants: Investment advisors, traders and even chief executives. No psychologists or trauma experts have spoken up. Yet, consider the stock market’s wild gyrations in the weeks after the attacks. Its behavior is as much a psychological tale as one of dollars-and-cents investment basics.

We shouldn’t ignore financial basics or clear economic consequences of the attacks, of course. Some direct consequences do exist, particularly for the likes of airlines and insurance companies. But generally, the current market reaction is more a function of psychology than of finance.

It is true that investment fundamentals are rooted in psychology; investment involves risk, and risk involves human instincts, emotions and judgments. The market today, however, is undeniably dominated by raw, powerful emotions such as fear, panic and even a little hope now and then. So from a psychological perspective, based in large part on lessons from the past, here are a few thoughts on the implications of the attacks on the economy, the stock market and us.

Time Heals Emotional Wounds

With the exception of the anger we feel toward the terrorists, many of our emotions about the attacks are similar to those felt by people affected by natural disasters, such as earthquakes and hurricanes. The sense of helplessness and randomness that we feel after being attacked by suicide terrorists mirrors the feelings experienced by people involved in those large-scale natural disasters; waiting out aftershocks following an earthquake is eerily akin to the uncertainty that exists today about possible future terrorism.

We can learn from these experiences by considering how people have recovered from them. Among the things we know is that after time-days, weeks, and months -these fears begin to subside, and we can and do resume normal lives.

To be sure, the emotional turmoil of Sept. 11 will pose special trials. Reminders are literally in front of our face: Flags on cars, obituaries in newspapers, images of destruction on television. These reminders won’t go away any time soon; most likely, they won’t go away at all. In all sorts of ways, we will be required to accommodate their intrusion into our lives.

How do you move beyond shock when reminders keep coming at you? How do you learn to accept them into your life without shock-and then not feel guilty about that? It takes time, and some people need more than others. While we will never totally forget what transpired, a sense of normalcy will reappear eventually for most of us.

It’s important to remember that in these emotionally difficult times. We need to accept and acknowledge that psychological wounds, just like physical wounds, do not heal overnight. But they do heal.

Take Comfort in Collective Effort

Many of us feel the need to do something, and doing something collectively comforts us. These efforts have the combined effect of helping take our minds off the problems at hand and making us feel good about acting in some positive and constructive way.

The pervasive displays of patriotism that abound are an example of collective response to the attacks; they let us show support for people in the trenches of Central Asia or the ruins of lower Manhattan. Many people have flocked to donate time and money to those who have been directly burdened by the attacks.

Continuing to invest in the stock market, continuing to carry on in the financial world and refusing to panic, constitutes something constructive, positive and patriotic. Some people even suggested it was a patriotic duty to not sell on the day the market opened and therefore not to contribute to the downfall.

This concept is not too different from buying war bonds 60 years ago. By not panicking and by holding or buying stocks, we make an individual investment in preserving and stabilizing our nation’s economy, which can have a tremendously positive collective effect. Indeed, we are doing something patriotic.

The idea might strike some as distasteful-how can we think of money and investment at so serious a time? With thousands dead and the prospect of war looming, how relevant can market maneuvers really be?

They are terribly relevant. Market investments and business deals must happen for this country to survive economically. Working to move that part of America forward again makes us feel like real participants in preventing any further disruption to our lives. If we feel like we’re moving forward, we can regain a firm grasp on our emotional stability.

Perhaps strangest of all is that this patriotic gesture might actually make us all some money in the long run, and not be a net cost after all.

Remember Economic History is Cyclical

Those people who have invested at the bottoms of cycles and ridden out down cycles, those who stayed the course and didn’t panic, have always made out well in the end. And that is as measured by years, not decades.

A recent study by Salomon Smith Barney of 10 major national crises starting with the Pearl Harbor attack in 1941 indicates that the stock market rose an average of 12.7% within one year following such events.

History also seems to tell us that cycles are getting shorter; government has better ability to manipulate the economy than previous eras; businesses have better technology that let them react more adroitly.

So, from a psychological perspective, our advice is to focus on establishing some emotional stability ourselves by putting the terrorist atrocities into perspective. Yes, they were horrible. But individually as people, and collectively as a nation, Americans have shown a tremendous propensity for enduring emotional pain and recovering. There is every reason to believe that we will succeed on this occasion as well.

At a time when our fundamental beliefs are challenged, when we are disillusioned and don’t know what to believe, we need to take solace in the capacity of the human spirit to rebound-and do our part where and as we can. t

Marcia C. Brier and Helene Stein, Ph.D., are the co-founders of and partners in Family Legacy Services, a consulting service to financial advisers, family offices and private client departments.