The Psychology of Panic Buying (and Selling)
Do you remember the toilet paper craze of 2020? Or the gasoline hysteria of 2021? Perhaps you were one of those people who heard about the potential shortage and immediately went to get yours. If so, this was actually a relatively normal response. And it's called "Panic Buying".
A recent study from the Journal of Experimental Psychology looked at the behavior triggers that lead to a buying frenzy. What they found is that uncertainty plays a major role in our purchase decisions; and not just uncertainty, but more specifically, unexpected uncertainty.
Unexpected uncertainty is a powerful motivator that pushes us to change our normal behavior, even when it's not necessarily beneficial for us (like loading up your trunk with trash bags full of gasoline). In moments like this, changing our behavior is a strategy subconsciously used to regain control of the situation. Even though we're doing something we wouldn't otherwise do, or something that isn't even beneficial, it provides a sense of control over a situation that feels out-of-control.
This is exactly what happened in 2020 with the toilet paper shortage triggered by COVID lockdowns. It was a huge unexpected uncertainty. None of us have ever experienced anything like that before, which led to a panic. And society decided that harvesting toilet paper would be a way to take back control over the situation, which ironically, led to just the opposite. Had everyone just bought toilet paper as normal, there never would have been a shortage. The same thing happened with gasoline in 2021; the fear of shortage actually triggered the shortage.
As chaotic as these situations were, it's normal human behavior. It's how we're wired to respond in unexpected uncertainty. And people often do the very same thing with investing. They see what everyone else is doing, they get scared, and make an impulsive decision out of fear, which doesn't end well 9 times out of 10.
However, there is a way we can better manage this, so we're not simply slaves to our impulses:
Be aware of how uncertainty impacts you. Oftentimes, we're better off sticking to our normal behavior in moments of uncertainty. As tempting as it is to panic buy (or sell), it often makes the situation worse. So next you're feeling the urge to change your behavior simply because that's what everyone else is doing, take a moment to ask yourself if this will actually improve your situation in the long term.
Be comfortable with uncertainty. The only certain thing in life is uncertainty. The sooner we focus on things that are inside our control, the easier it will be to adapt to moments of uncertainty. Unless you have a crystal ball, you will never be able to predict the future. So save yourself the emotional turmoil and stop trying.
In summary, while reactive strategies are a normal part of human psychology, they often aren't good decisions in the long run.