Can Fear Be Good for Wall Street?

Faculty member Dave Lebel

Conventional wisdom on Wall Street suggests that investors should not let fear influence their decision making. Too much fear among investors can have a strong negative impact on the stock market. However, recent articles in the Wall Street Journal and other media outlets suggest that investors may not have enough fear given the current economic outlook.

How can this be?

While high levels of fear can certainly paralyze us, experiencing some level of fear can be beneficial. There is now evidence across a range disciplines, including my research in Organizational Behavior and also in Finance, describing the situations when fear can motivate productive action.

Fear can focus our attention on potential threats that could harm us and enable us to take protective action to avoid future threats. For example, employees worried about economic uncertainty (e.g., possible layoffs or economic downturn) may proactively look for new job opportunities or work harder at work in an effort to secure their job. The latter is especially likely when an employee has a supportive boss or co-workers. In short, under the right circumstances, a little bit fear can be helpful for us.

What does this mean for Wall Street? Experiencing fear can signal that danger is ahead, which is critical for investors trying to discern when the next market downturn may occur. Moreover, investors cognizant of highly uncertain political and economic currents may be anxious about future financial returns, which may proactively motivate them to find safer investments or to short the current market in the hopes of avoiding larger losses down the road. Or feeling that twinge of anxiety may signal that it is okay to diverge from common wisdom regarding future market growth, thus spurring more defensive (rather than aggressive) investment behavior.

For managers on Wall Street, this could mean proactively seeking input from investors and employees. They may take in a diverse range of ideas and opinions. Doing so may identify current issues and threats, allowing the manager to take corrective in advance of a market downturn.

Additionally, given the importance of having supportive supervision for those employees who experience fear at work, it could mean allowing subordinates to express diverging views and/or take actions that are different from mainstream market views. Providing a listening ear may enable an employee to have the courage to speak up when identifying troubling market trends, even when others may not see the potential for threat. At the very least, hearing about a number of potential trends (whether good or bad) can help the manager undertake a more balanced investment approach.

In short, fear, for lack of a better word, may actually be good for Wall Street.

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