Petrol panic & behavioural finance

The people of the UK have been acting collectively in a rather silly manner in recent days.

Following talk of a possible strike by fuel delivery drivers, the government did the sensible thing of encouraging people not to queue for petrol.

One cabinet minister said something about keeping a spare few litres of fuel at home, and then panic ensued.

Despite the fact that there was no disruption to fuel supplies and no strike could start for at least a week, many petrol stations across the UK saw extensive queueing and subsequently ran out of petrol and diesel until their next deliveries.

Rational individuals understood that there was no risk of losing access to fuel supplies due to the possible strike action. They did see queues, empty petrol stations and the headlines on 24-hour news channels – and they acted accordingly.

Behavioural finance is the study of social, cognitive and emotional factors on the investment decisions taken by individuals. As an event largely driven by emotion rather than logic, what lessons can investors learn from the recent petrol panic?

It could have been herd behaviour that prompted the petrol panic. Herd behaviour describes how individuals in a group can act together without planned direction.

This behavioural finance theory has often been associated with stock market bubbles and crashes. Such events are often irrational and driven by emotion; greed when the markets are rising quickly and fear when they are crashing.

As the world becomes increasingly better connected (the Internet and Social Media is thought to have played a big part in fuelling petrol panic last week), we might expect to see even greater levels of greed and fear from investors.

A stock market bubble twenty years ago would have been communicated fairly slowly, certainly outside of City circles. When we see the beginnings of a stock market crash today, it is instantly shared in graphic detail across multiple communication channels, even beamed directly to our phones.

Perhaps investors can benefit from an understanding of behavioural economics by better recognising where emotion is the driver, rather than rational decision making.

Sometimes stepping back from events and taking a considered view of what is taking place is the best way to avoid joining the herd and making regrettable, expensive and wasteful decisions.

Photo credit: Flickr/London Permaculture