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They are also selecting for 90% drops in equity (why 90%? what were the results when different numbers were selected?). In these cases, someone has lost most o

They are also selecting for 90% drops in equity (why 90%? what were the results when different numbers were selected?). In these cases, someone has lost most of their net worth and so they may find the rest of their assets are being liquidated, and they need to empty their account to discharge other liabilities. The reason why market downturns are correlated with panic selling is because market downturns are correlated with other things. The reason market cycles happen is largely because of the changing value that people place on cash...in 2008, lots of people needed cash. And 90% is a very large number, the max drawdown on the S&P in crashes is usually less than half this number...so I am not quite sure why they are looking at this number when it doesn't really reflect a realistic scenario for most people. Losing 90% is inherently extreme, I worked in finance, I am relatively good at investing...if I lost 90% of my money, I would time myself out. I know of no investment business in the world that would keep someone on after a 90% loss...zero. Some multi-strategy firms will fire you if you lose 5%. Additionally, as you say, people who have money tend to protect their downside. If you have $1m, and you lose 90%...you still have $100k. This tends to be particularly misleading when you look at a sample in which the market has always gone up and recovered...because it always looks like there was an opportunity cost from exiting (and if there wasn't, these papers don't get written). The paper is inferring reason to a decision that they don't really know the reason of. I 100% agree that "freaking out" can be (and often is) a rational choice. Ask someone who "freaked out" in 1991 when Japan tanked. I actually know a firm that didn't "freak out", they were strong investors...firm nearly died, they lost pretty much all their client's money, and the Japan business effectively folded...but yes, those idiots who "freaked out"...rakakakaka.

jacobr1 5y ago
I read it differently: "a decline of 90% of ... equity assets ... of which 50% or more is due to trades." This means that 45%-90% of equity was sold off ... they identifying the large sell-offs moreso than just equity drops.
- hogFeast 5y ago
  I thought I understood briefly...I don't anymore. I think the part that is confusing is the 50% part...50% of what? But I am right in saying that the drop in assets has to be at least 90%?
  - jacobr1 5y ago
    There is not measurement of a "market drop," only a decrease in the equities in the account - this includes BOTH the sale and the market loss. Here is an example: Month 0 STOCKS: $100 CASH: $0 Month 1 STOCKS $10 CASH $65 The account holder had their equity holding decrease by 90%. But that is composed of a market loss of $35 and their sale proceeds of $65. 65 / 90 = 72% (which is greater than 50% of the total decrease). The 50% filter explicitly excludes those that just have market losses, the trader needs to have actively sold between 45-100% of their account value, combined with market losses between 0-45% for a total decrease of 90-100% between both factors.
    - hogFeast 5y ago
      Ah, that makes sense. So it is any decline in equity assets through which the rate of selling is faster than the decline in the underlying assets (presumably...if the rate of selling was slower then the ratio would be less than 50%?). I still have the same problem. The reason cycles cycle is because of the movement in money demand...which tend to be correlated to everything else. Being able to predict who will panic-sell could be correlated to other things (always a problem in financial economics). I will need the read paper properly but would be interested to see how they deal with cash coming into and out of the account.

jacobr1 5y ago

I read it differently: "a decline of 90% of ... equity assets ... of which 50% or more is due to trades." This means that 45%-90% of equity was sold off ... they identifying the large sell-offs moreso than just equity drops.

hogFeast 5y ago
I thought I understood briefly...I don't anymore. I think the part that is confusing is the 50% part...50% of what? But I am right in saying that the drop in assets has to be at least 90%?
- jacobr1 5y ago
  There is not measurement of a "market drop," only a decrease in the equities in the account - this includes BOTH the sale and the market loss. Here is an example: Month 0 STOCKS: $100 CASH: $0 Month 1 STOCKS $10 CASH $65 The account holder had their equity holding decrease by 90%. But that is composed of a market loss of $35 and their sale proceeds of $65. 65 / 90 = 72% (which is greater than 50% of the total decrease). The 50% filter explicitly excludes those that just have market losses, the trader needs to have actively sold between 45-100% of their account value, combined with market losses between 0-45% for a total decrease of 90-100% between both factors.
  - hogFeast 5y ago
    Ah, that makes sense. So it is any decline in equity assets through which the rate of selling is faster than the decline in the underlying assets (presumably...if the rate of selling was slower then the ratio would be less than 50%?). I still have the same problem. The reason cycles cycle is because of the movement in money demand...which tend to be correlated to everything else. Being able to predict who will panic-sell could be correlated to other things (always a problem in financial economics). I will need the read paper properly but would be interested to see how they deal with cash coming into and out of the account.