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Housing Bubble Deflation - The Stages of Grief

Published by Lawrence Roberts | December 26th 2008 | Views:

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Markets are the collective actions of individuals, and the psychology of the markets can be broken down to the psychology of the individual participants who make it up. When price levels in a financial market collapse, most people lose money. Any loss has a psychological impact on the individual causing her to experience grief. The grieving process is generally divided into several overlapping stages: denial, anger, bargaining, and acceptance. These stages are also apparent in the mass psychology of the market.

When prices first drop, the individual market participants feel confusion and attempt to avoid the truth. They feel denial. This is motivated by fear (or truth) they may have been wrong to purchase when they did, and they might lose money. They seek ways to quell these fears. Rather than attempt to objectively review facts to ascertain whether or not the unexpected market behavior is the beginning of a new trend, most market participants will seek out data consistent with their original assessment. Denial is a natural reaction, but it is a very costly one when applied to a financial market.

When the initial price drops in the market begin to show the signs of a new trend, market participants become fearful. They work to maintain their denial, but there are moments when the awful truth cannot be contained. The little, fearful voice inside of each buyer gets louder and louder. This boils over into anger, frustration, and anxithe individual seeks ways to get out of the problem through emotional bargaining. This behavior is often takes the form of a negotiation with Fate or the market. One amusing example of this behavior is the purchase of a St. Joseph statue. Burying this statue in the yard is supposed to secure God's blessing and ensure a quick sale. Some will take more productive action. Perhaps it is lowering an asking price, or taking the property off the market and doing some renovations to "add value." Some will not take action, and they lapse back into denial because the market is "coming back soon." Those owners who chose to lower their price as part of their bargaining may get out with minimal losses (assuming they lower it enough to actually sell). Those that choose other courses of action, lose much more money.

In past market declines each individual reached acceptance of the market reality. Some chose to continue making payments on their "investment" and wait out the bear market. In the aftermath of the coastal bubble of the early 90s, many sellers accepted the market was a buyer's market, and many sellers chose to keep making their payments and keep their properties. Those that chose to keep their property in the Great Housing Bubble did not have the ability to make these payments, and the property became a forced sale at a foreclosure auction. Some individuals reached acceptance and chose to sell their property on their own.
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