Behavioral Finance and the Coronavirus Bear Market

Abstract

On March 11, 2020, COVID-19 was declared a global pandemic, and by March 20, US and global equity markets had officially moved into a “bear market” state following losses of more than 20%. Market volatility and repeated days of market loss wreak havoc on the psychology of market participants. The good news is that markets recover relatively quickly from exogenous epidemic events, such as the 2020 novel coronavirus. Despite the discomfort caused by short-term volatility, it is important to stay invested and not to deviate from long-term strategic plans. This article seeks to give some behavioral finance explanations of why this angst is happening and some perspective on bear markets—so that investors can reduce panic and make sound investment decisions.

TOPIC: Volatility measures

Key Findings

• • Behavioral finance explains much of how investors behave in panics. This article explains some key biases that should be understood by advisors and clients so they can optimize performance of investment portfolios during market corrections.

• • Markets recover relatively quickly from exogenous epidemic events, such as the novel coronavirus that is happening in Q1 2020.

• • It is important to stay invested. While short-term volatility may be uncomfortable, it should not cause us to deviate from long-term strategic plans.