Periods of acute stress in the markets offer intriguing examples of how our brains work
Back in the days of the “last” market crisis in 2008, a senior official at an interdealer broker – one of the firms that trade securities – observed an interesting pattern. Until then, he, like most traders, had assumed that finance was becoming an increasingly global, computerised game. In a world ruled by the internet, it was easier than ever before to trade with anyone, anywhere. In an era of 21st-century cybermoney – if not Star Trek – finance, bankers had evolved to control space and time.
But when Lehman Brothers collapsed, evolutionary “progress” crumbled. Suddenly, traders started placing orders by telephone, rather than computer, dealing only with people they knew personally. They were also refusing to take long-term decisions. Sometimes there were entirely rational explanations for this shift, but mostly the reaction was instinctive. “It was almost primeval,” my friend quips.