Fear in Financial Economics

Jyotirmayee Kar

The IUP Journal of Financial Economics, 2008, vol. VI, issue 1, 77-87

Abstract: Risk perception about uncertain events gives rise to fear. Studies have observed that people, in general, overreact to fear and hence they consider some events to be riskier than they actually are. Such a perception brings about a sea change in asset pricing in general and stock pricing in particular. At some point of time, fear begins to outweigh hope for some investors. With the loss of hope, the bubble suddenly bursts for everyone, since it never had a solid economic base. Once panic sets in, prices plunge. This panic is just as irrational as the enthusiasm that fueled the boom, and prices often fall below a level justified by economic reality. However, shocks are always accompanied by opportunities and they always improve the knowledge base, the coping capacity in the event of a crisis and strengthen team spirit. The kind of shock and fear an economy may face in future are unpredictable but they are inevitable. Now the economy of India is strong enough with an active financial sector to handle those disturbances and respond positively to favorable opportunities. This has improved the confidence of the business and the investors. Now they are more willing to take risk and explore new avenues of investment. It has improved their faith in the system. In essence, faith and confidence underpin the market, which can thrive and operate, and in the process business can generate enough funds at the time of need.

Date: 2008
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