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Reacting to the Financial Crisis: Psychology & Investing

written by: Noreen Gunnell • edited by: SForsyth • updated: 2/16/2012

This lesson plan is part of a series on the current financial crisis. It considers the psychological factors that affect people's reactions to a falling market. The lesson asks students incorporate ideas about emotional decision making into a group project outlined in the first part of this series.

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    The lesson plan below looks at the psychological aspects of the financial meltdown.It asks students to read an article and incorporate the ideas presented into the sketch their groups are writing. It is part of a social studies unit but can be used as an economics, psychology, or sociology lesson plan.

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    The Psychology of Investing

    We often make decisions based on emotion rather than rational thought. This is true of small, every day choices and large, life-altering decisions. The way many investors behave during a steep, downward spiral of the stock market is an example of emotion driven decision making. The response of investors throughout stock market history is predictable. The response to the financial crisis is not different from the reaction of investors to The Crash of 1929, The South Sea Bubble mayhem in the 1700s or the Tulip Bulb Craze of the seventeenth century. The overriding motive during each bubble was greed and the dominant emotion in every crash was fear. Greed led to speculation and fear inevitably spurred panic.

    The article Swept up By Insanity of Markets (New York Times, October 11, 2008) by Joe Nocera compares investing to romance in that how we feel often overrules what we think in finance as in love. Students should read this article in class then split into their groups. Using the theory presented in Nocera‘s article and the factual information they learned in previous lessons, students will develop a basic biography of the main character in their skit. This is designed to help students begin to develop their sketch but outside research and work will be necessary.

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    Guidelines for Main Character's Biography

    Each group should determine their main character's:

    • Gender and was this significant to their emotional reaction to the crash.
    • Profession and did this influence the psychology behind his or her investment choices.
    • Place of residence
    • Age and if it was a factor in their response to his or her falling investments.

    Each group should decide the following about their character:

    1. Why he or she chose to invest.
    2. What he or she invested in.
    3. How he or she reacted to the crash and why.

Understanding the Financial Crisis

This series will discuss financial crises and financial market bubbles and crashes. The articles contain lesson plans that culminate with the class divided into four groups representing four stock market crashes; each group will write a skit about a person who loses money during their crash.
  1. Stock Market Crashes: Today & Yesterday
  2. Stock Market Crashes: Three Crashes from Times Gone By
  3. Reacting to the Financial Crisis: Psychology & Investing
  4. Frequently Used Economic Terms for Lesson Plans