March 6, 2009, was the S&P 500's darkest hour during the financial crisis, and since then everyone has studied investor behavior to understand how the market might react in the future.
It was some time in the first quarter of 2009, standing outside the NYSE, when I realized that my entire generation got scalded.
At the end of it all, the average household was 20 percent poorer in 2009 than just two years before: The net worth of U.S. households and nonprofit organizations went from $69 trillion in 2007 to a trough of $55 trillion in 2009. February 2009 was a fearful time. An attempt to bottom had been made in October 2008 , but it had failed. Then, in November we hit new lows.
A week later, the market had staged a notable rally as bank stocks rocketed off a bottom. The bank index was up 45 percent from the previous week on positive comments from bank executives. The S&P 500 was up 12 percent Even during the financial crisis, certainly most investors realized the U.S. economy was not going to go to zero, so selling this far down made no economic sense. But that is exactly what happened, and this event helped popularize the entire school of behavioral economics, which emphasized how people really behaved under economic stress, not how they were supposed to behave.
It wasn't just the rationality of humans that took a hit. Efficient market theory, which says humans act in a rational way and make the right decisions because they have access to all available data, also took a hit. Stock market bubbles and panics are now largely viewed through the lens of behavioral economics. It is now a given that markets may not be perfectly efficient and that irrational decisions made by investors have a big impact.
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