On Tuesday US stock markets and the dollar-yen rate took a tumble after someone hacked into Associated Press’s Twitter account and then tweeted that there had been a terrorist attack on the White House. Earlier this month, on two separate days, the gold price fell the most it has in 30 years.
Neither move had solid foundations. A look at a TV screen or the rest of the internet – let alone Twitter itself – would have told investors there had been no such attack. And commentators have come up with a range of esoteric explanations as to why gold sold off so sharply, but none of them hold much water. Gold is traditionally a haven when things elsewhere are going wrong. But the gold price fell at the same time as the S&P 500, the US’s leading share index, and the yields on ten-year US treasury bonds.
What links both cases is the unavoidable conclusion that investors sold because other investors sold – in other words, a herd instinct kicked in. Until economists and regulators are able to incorporate the fact that human beings behave in such ways into their models and rules, our understanding of the financial crisis, and our ability to avoid another one, will remain limited.