Long Toilet Paper / Short Equities – Why We Panic Buy and Sell

Panic is an overwhelming feeling of fear that can dominate our decision making.  It typically begins with a significant and sudden change in circumstance.  The outbreak of coronavirus has provided numerous examples of decisions that are seemingly fuelled by stress and uncertainty; from the bizarre stockpiling of toilet paper to the dramatic daily moves in equity and credit markets.  From a financial market perspective discussion around the recent explosion in volatility often centres on changes to market structure, liquidity and leverage.  But panic buying and selling is primarily a behavioural phenomenon – what are its main causes?

Scarcity: Panic purchases are often the result of a current or future scarcity of a good or service.  The case of toilet paper hoarding is an issue driven by self-perpetuating scarcity – where the very scarcity is caused by other peoples’ perception of it.  This type of panic can persist even when nobody can remember its initial causes.  It feeds on itself. 

Whilst the scarcity issue is obvious when it comes to the panic purchases of toilet paper, it is also evident in financial markets.  Although the asset or security may not be scarce features of it may be; for example, the ability to transact at a certain price, or any price.  An assumed or real limit on the ability to sell can induce panic – like the shout of “fire” in a packed theatre, we fear that the exit may not be available to us all.

Other people: Panic buying and selling is always about how we react to the behaviour of others (and how they react to us).  This comes in a number of guises:

The ‘wisdom’ of crowds: Panic can be caused by the assumption that there is information in the behaviour of others, and the greater the number of people engaging in certain activity the more we believe that they possess knowledge that we do not.  The problem is that crowd wisdom tends to arise in situations when there is a level of diversity of thought and an independence in how people in the crowd have reached a view.  When panic buying or selling occurs, the reverse is true.  The behaviour of the group is a result of individuals reacting to the same, very narrow set of information, or simply following others.  The wisdom of crowds swiftly becomes madness. 

Thresholds: In a related fashion, sometimes we simply act because other people are, even when we are not aware of what is driving the initial behaviour.  Sociologist Mark Granovetter described a threshold model, where a decision made by an individual to engage in an activity is led simply by how many other people are doing it.  Each individual will have a different threshold for engaging in ‘mob’ behaviour, which is the point at which “the perceived benefits to the individual of doing the thing in question, exceed the perceived costs”. 

Failing conventionally:  The notion that our propensity to join mass group behaviour is related to some form of cost / benefit threshold is intertwined with our preference for ‘failing conventionally’, which is a huge influence on the behaviour of professional investors.  The management of career risk and the desire to protect assets means that the behaviour of others matters profoundly, irrespective of whether we agree with or understand it.  Even if our behaviour is extremely irrational from any fundamental investment perspective, it can be supremely rational for us as individuals.  We are less likely to lose our job doing what everybody else is.  If you are going to be wrong, don’t be wrong alone.

Removing worry: As panic is a result of fear and anxiety, the actions that come as a consequence are typically carried out in an effort to relieve it.  Our decision making becomes centred on a single goal – removing the worry. The greater the uncertainty and the less control we feel we have the sharper the urgency for us to act.  Panic buying and selling occurs when the cause of the worry is shared by many people, which results in numerous individuals taking similar actions.  As with the other primary causes of panic, these actions become self-reinforcing – the desire of others to reduce their own worry, serves to create and increase fear in others.

What is the easy way for investors to mitigate the fear and uncertainty around the financial and economic impact of coronavirus?  To sell risky assets and hold cash. Although it may be a damaging long-term decision, this is outweighed by the palpable short-term relief.  Even with the puzzling toilet paper hoarding there are similar factors at play – once we have filled the garage with 600 rolls, we no longer have to expend energy worrying about the issue.  

Contracting time horizons: One of the most important features of behaviour under stress for investors is how our time horizons contract.  In the midst of panic our concern becomes singularly focused on what is happening right now; we are gripped by the fears of today and abandon any thought of the future.  Whilst in certain situations in life this can be considered an  effective adaptation for meeting our long-term investment objectives such myopia can be staggeringly damaging 

Emotional decision making: Our attitude toward a given risk is heavily influenced by its emotional salience.  How we perceive both the likelihood and magnitude of a threat can be dominated by its prominence (or availability) and how it makes us feel.  As Cass Sunstein discusses in his work on probability neglect, if something provokes a strong emotional reaction then we tend to disregard how likely that risk is to occur and focus on its potential impact (usually the worst case scenario).  When decisions are made in a state of panic risk becomes about how we feel, not think.

Panic buying and selling represents the very worst of our investment behaviours – it is emotion laden, focused on the short-term and driven by the behaviour of other people. Whilst it can have incredibly harmful long-term consequences for investors, it offers the often irresistible allure of making us feel better and worry less, immediately.  We need to avoid such behaviour, but telling ourselves not to engage in panicked decision making doesn’t work.  We need to take concrete steps to avoid it.  These include:

  • Having a clear and appropriate investment plan.

  • Using decision rules.

  • Systematising investment decisions (rebalance and reinvest)

  • Thinking about difficult market conditions in advance (pre-mortem).

  • Checking our portfolios less frequently!

Such steps provide no guarantee that we will resist, but they give us a fighting chance. 


Granovetter, M. (1978). Threshold models of collective behavior. American journal of sociology, 83(6), 1420-1443.

Sunstein, C. R. (2002). Probability neglect: Emotions, worst cases, and law. The Yale Law Journal, 112(1), 61-107.

How to Deal with the Behavioural Challenges of Bear Markets

It is at times of severe market stress that our worst behavioural impulses come to pass. Whilst the recent losses in the value of portfolios are undoubtedly painful; the poor decisions that we will make as a result of the torrid environment will likely prove more damaging to our long-term outcomes.  

Against such a turbulent market backdrop, which behavioural issues should we be most concerned about?

Myopic Loss Aversion:  Short-term losses are difficult, but they are also an inevitable feature of investing in risky assets.  Indeed, the high long-term returns from equity investment are a consequence of their volatility and the potential for severe losses – to enjoy the benefit you must be behaviourally disposed to bearing exacting periods.  For most investors (particularly younger ones) it makes sense to reframe the issue – rather than markets falling precipitously we should think about the likelihood that long-term expected returns from risky assets are now materially higher.

Recency:  Our obsession with recent and salient issues means that they overwhelm our thinking.   Whether it is trade wars, Brexit or coronavirus.   This is not to say that such issues are not important but from a long-term investment perspective they are less vital than we think and feel they are at the time.  Try to make investments on the basis that we have to leave them untouched and unseen for the next ten years.

Risk Perception:  We are poor at judging risks.  We are prone to ignoring certain threats whilst hugely overstating others.  Our judgement about the materiality of a risk tends to be driven by its availability (how aware we are of it) and its emotional impact on us.  The coronavirus is a particularly pernicious risk for investors both because the magnitude of the impact is highly uncertain and it is deeply salient.  We also need to be clear about what risks we are considering when making an investment decision – is it the risk of short-term losses, the risk of being whipsawed by volatile markets, or the risk of failing to meet our long-term objectives?

Narratives:  Although we should be driven by evidence many of the investment decisions we make are founded on compelling stories.  In times of profound uncertainty this flawed feature of our decision making becomes highly problematic.  It is incredibly uncomfortable to acknowledge that we have no clarity around a major issue such as coronavirus; so we construct stories to relieve our discomfort.  These narratives help us ‘understand’ what has happened, but also, more damagingly, give us undue confidence about what will happen in the future.  It is better to admit that we don’t know, rather than concoct a story.

Overconfidence:  In the past three months everyone has become an expert in virology, despite having no previous grounding in the subject.  It is okay to have an opinion, but the vast majority of people are guessing, and nobody knows the near term market or economic impact of the virus.  We shouldn’t make investment decisions that suggest we do.

In these environments making sensible long-term investment decisions is highly likely to leave us looking foolish in the short-term.  This doesn’t mean, however, we should not make them.  Remember if we are looking to invest in assets that appear to have become materially cheaper it is almost certain that we will not call the bottom and things will get worse filling us with regret.

The advantage of being able to invest for the long-term is at its greatest when it is the hardest thing to do.  The only way to benefit from this is to have a sensible investment plan that is clear about objectives and the decision making process.  Sticking with this through tough times can provide a major behavioural edge.

Why Are We More Worried About Coronavirus than Climate Change?

Whatever your view on the scale of the response to the outbreak and spread of coronavirus it is an issue that is provoking both fear and action.  Although the behaviour of governments, financial markets and the general public is not necessarily irrational; it is interesting to contrast it with our apparent indifference toward the catastrophic long-term effects of climate change. What is it about human nature that makes us mobilise urgently against coronavirus, but be afflicted by apathy and indecision when it comes to global warming?

The nature of a risk matters greatly in how we react to it.  Coronavirus can be considered a present threat over which there is a great deal of uncertainty about its scale and impact; there is a significant possibility that its long-term impact is negligible.  Contrastingly, climate change is (predominantly) a future threat, but there is a high level of confidence that its long-term impact (without intervention) will be catastrophic for humanity.

It is our tendency to significantly overweight the importance of what is happening now relative to the future that is perhaps the largest impediment to our hopes of successfully mitigating climate change risks.  Our reaction towards the coronavirus outbreak is an excellent example of our predilection to focus on a near term negative payoff (even if the potential negative consequences are highly uncertain), whilst at the same time neglecting to attend to a large negative payoff in the future (even if grave consequences are certain).  As much as anything our failure to deal with climate risks is a temporal problem.

Our bias towards the present is also accentuated by political incentive structures.  This is a particular challenge for democracies – where the frequency of elections / brevity of terms in office mean that politicians are focused on actions and activities that will see them retain power in the short-term.  If they make the electorates’ life more difficult it reduces their chances of being re-elected; even if the imposition of discomfort now is designed to deliver incalculable benefit in the future.  As heretical as it may sound, there are valid questions to be raised about whether a democratic system with regular elections is suited to dealing with an issue that requires short-term sacrifice for long-term benefits.

Dealing with climate change is about trade-offs.  Are we willing to suffer near term inconvenience and friction in our lives, for a benefit in the future that may not directly impact us and seems somewhat abstract  Unfortunately, judging by current progress, the answer seems to be no.  With coronavirus the trade-off is more balanced because we are accepting some inconvenience now to ward off a present and personal threat.

There is undoubtedly a selfish quality in how we react to the relative risks of coronavirus and climate change. Although I am sure we care about ‘future generations’ they seem remote and removed.  Contrastingly, the potential victims of coronavirus are ourselves, our families and friends; which give us far more urgency in our actions to combat it.

Our reaction to the coronavirus risk is also driven by its salience.  The implications of contracting the virus are vivid and emotive; we can directly observe the current impact.  How we feel about a situation and how available it is to us can lead us to greatly over or understate the risks involved.  Climate change by contrast suffers from its most significant costs being in the future, whilst being difficult to clearly envisage or even link directly to our own actions.  Even with incidents such as the recent wildfires in Australia – where it is seemingly unquestionable that the severity of these is a result of global warming – the inability to draw an unequivocal direct causal link between our own behaviour and the consequences gives us leeway to remain apathetic.

The unfortunate lesson for climate change that can be drawn from our response to coronavirus is that we will act* but only when its implications are current, salient and affecting us directly.  By which stage it will likely be too late to undo much of the damage.  Part of the solution to climate change must therefore be acknowledging the behavioural problems we have in dealing with future risks, which means creating policies that force us to suffer short-term cost for the long-term good.

* Clearly actions are being taken and behaviour is changing, but not enough to meet the targets of COP 21, for example.

Investors Should Not Be Making Forecasts About Coronavirus

You have to have some sympathy for those strategists working at asset managers and investment banks who spent the tail end of last year writing lengthy outlook pieces for 2020.  Although the tomes produced always have an inbuilt redundancy; the onset and spread of coronavirus (COVID-19) has upended all forecasts in a particularly dramatic and rapid fashion.

For investors the staggeringly swift reshaping of the prevailing investment narrative should have served as a sharp reminder of the futility of short-term forecasts.  The complex and adaptive nature of financial markets means that making predictions about the near future with any level of specificity is an utter folly.

Unfortunately, as investors hastily recalibrate their market expectations they have not become more circumspect about forecasting imponderables – quite the contrary.  As the perceived risk has heightened there seems to be an increased production of speculative prognostications.  Most asset managers are now producing their own viewpoints on the potential ramifications of the virus.  There is puzzling need for detailed opinion pieces from financial market practitioners about an incredibly uncertain topic about which they have no specialist knowledge.

It is not only opinions that are sought after when the market environment becomes challenging, but actions also.  In periods of tumult trading is required to show that these new risks are being addressed and accounted for.  The biggest danger for investors is the temptation to engage in heroic trades; either removing risk entirely on basis that there will be severe economic and market ramifications from the virus; or conversely increasing risk substantially because the market has overreacted.  The outcomes here are binary: one group will receive praise for their sagacity; the other will be seen as reactionary and injudicious.  Both sides are merely guessing.

If investment decisions are being made related to the progression of the outbreak, it is worth considering the complexity of such predictions.  It is far more than anticipating the spread of a virus (which in itself if an improbable feat); but the second and third order effects – the decisions politicians will make, how people in those countries will behave and, crucially, how investors will react.  Even if we had perfect foresight of how the virus would evolve over the coming months, it would still be impossible to confidently predict the market and economic implications.

The new coronavirus outbreak inevitably creates a tail risk of severe economic dislocation and market weakness, but nobody can possibly have any confidence in the probabilities around such sharply negative outcomes occurring.  The idea that we can correctly gauge whether financial markets are accurately ‘pricing’ such uncertainty is entirely spurious.

Although the coronavirus outbreak (and the reaction to it) has the potential to precipitate an economic slowdown, earnings recessions and severe market decline (from a purely financial perspective); being a long-term investor means continually facing such risks.  It is simply that the virus is currently the most salient and available potential cause of such a scenario.  We should have a portfolio that is commensurate with our willingness to withstand them; from both a financial and behavioural perspective.

Any communication related to this issue should be focused on the general principles of good investment behaviour during times of stress and volatility. Not specific commentary about a virus over which nobody has even a modicum of certainty over future developments.

Sensible investment rules such as diversification, rebalancing and adopting a long-term approach are only prudent because financial markets and human behaviour are so unpredictable.  If we had greater confidence about the future they would be entirely unnecessary.  Now is is not the time to abandon them.