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.