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How does psychology play a role in economics?

Asked by scotielee (117points) October 25th, 2009

I am currently researching macroeconomics and am curious on something.

When considering the the great crash of 1929 a lot of banks went under due to the public withdrawing all of their funds until the bank was left with nothing in cash and zero customers. After that point what is the bank left to do? Close. And was a lot of their effort an action thanks to the media and word of mouth?

I propose this question; what if the public left the worries, proposed by the public, of the bank failing out of their minds or didn’t react in such a way that would drain the bank’s cash? Rather, educated themselves on the facts of the banks health and likewise with the economy. Would the banking industry, in response, not fail or at least not take such a negative hit?

If “bad” or “negative” news regarding the stock market or banking industry on a main network in broadcast on a Monday night; how many people, immediately on Tuesday, rush to the bank and withdrawal their funds, or sell their stock?

The questions above bring me, more specifically, to my reason for this post and my specific question. How much of an effect on our markets do uneducated, psychologically-emotional-driven decisions have?

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