Predicting economic market crises using measures of collective panic

TL;DR

This paper demonstrates that extended periods of high market mimicry can serve as early indicators of economic crises, reflecting collective nervousness and self-organized panic rather than external shocks.

Contribution

It introduces the use of market mimicry measures as a novel predictor for economic crises, highlighting the role of collective nervousness in financial instability.

Findings

High levels of market mimicry precede major crises

Market mimicry indicates collective nervousness and uncertainty

External news influence is weaker during panic periods

Abstract

Predicting panic is of critical importance in many areas of human and animal behavior, notably in the context of economics. The recent financial crisis is a case in point. Panic may be due to a specific external threat, or self-generated nervousness. Here we show that the recent economic crisis and earlier large single-day panics were preceded by extended periods of high levels of market mimicry --- direct evidence of uncertainty and nervousness, and of the comparatively weak influence of external news. High levels of mimicry can be a quite general indicator of the potential for self-organized crises.