Reading war nerves

By MARTHA GRAYBOW in NEW YORK

Investors are feeling particularly touchy these days, and their mood swings are only likely to intensify as more drama unfolds in the war with Iraq, say experts in investor psychology.

"We are in a period that is very emotional," says John Nofsinger, a finance professor at Washington State University who studies investor temperament.

"As the war goes on, there is definitely the possibility of great swings in emotion and mood, which will immediately be reflected in the stock market."

Nofsinger and other experts in the growing field of behavioural finance - the study of irrational behaviour in the financial markets and what makes investors tick - say investing is always influenced by emotion to some degree, pointing to the internet share craze of the late 1990s as one example of investors taking things to extremes.

And now, with the country fixated on developments in the war with Iraq, played out on live television, the market impact of those emotions will be even more acutely felt, they say.

Already, the sharemarket has fluctuated wildly in the past nine days as people have changed their minds about how the war is progressing.

First, share prices surged as people thought the war would be a quick, easy victory for the US-led forces, then stocks fell back on concerns raised last weekend that things could get a lot more difficult.

Stocks regained some ground on Wednesday as the battles continued to rage.

"Everybody's watching the images on TV," says Woody Dorsey, president of research firm Market Semiotics and a behavioural finance expert.

"This creates more herding in the market because people are able to react more instantaneously."

Even professional money managers can make bad investment choices because they begin to think irrationally, says Thomas Mudge, portfolio manager of the Bailard, Biehl & Kaiser Cognitive Value Fund, a small-company fund that picks shares with an eye on investor psychology.

Investors typically overreact in their optimism and their pessimism - something that investors who follow behavioural finance theory try to capitalise on.

For Mudge's part, he tried before the war broke out to position his US$55 million ($100 million) portfolio to take advantage of long-term buying opportunities in shares he thought would benefit from investor concerns about the conflict.

He bought shares of economically sensitive companies such as Spherion, a recruitment and outsourcing company, and Pegasus Solutions, a company that makes hotel reservations technology. Both are the types of companies many investors shun while they fret about the war's impact on the economy, he says.

"Investors seem to be taking this very much day to day. There seems to be a lack of any longer-term perspective."

Nofsinger says investors may become even more emotional as the war drags on, especially if the images they see on TV become bloodier and more disturbing.

"We are going to see more civilians who are injured or hurt; children who are hurt. The longer that war occurs, the longer there is opportunity for those things to happen."

But others say the emotion of the war may die down, even if the conflict lasts for a while.

"It's clear the market is fixated on Iraq," says Dorsey, of Market Semiotics. But "we're likely to find that in two months from now, that whatever happens in Iraq, it will still be news, but likely it will not be front-page news."

- REUTERS

Herald Feature: Iraq