The Role of Financial Panics in Early And Not so Early Theories of Financial Crises

Abstract

Financial panics appear as the reactions to a fear of capital losses that cause a dumping of assets by investors and the collapse of a financial institution or market. Where social psychologist Gustave Le Bon (1995 [1895]) in his theory of crowd psychology argued that a distinct and distinctly irrational collective mind forms through the contagious transformation of the individual into a member of the “herd,” Floyd Allport (1924) suggests that the crowd mind is simply the aggregated feelings of individuals reacting to the same external stimulant. More recently, theories of collective behavior explore the sociality of human cognition. This paper examines the semantic and theoretical roles for “panic” in select treatments of financial crises and the extent to which any underlying collective behavior may be contagious, convergent, or emerging from the social interactions that shape a crowd mind.