Crowd psychology (or mob psychology) is a subfield of social psychology which examines how the psychology of a group of people differs from the psychology of any one person within the group. The study of crowd psychology looks into the actions and thought processes of both the individual members of the crowd and of the crowd as a collective social entity. The behavior of a crowd is much influenced by deindividuation (seen as a person's loss of responsibility) and by the person's impression of the universality of behavior, both of which conditions increase in magnitude with size of the crowd. Notable theorists in crowd psychology include Gustave Le Bon (1841-1931), Gabriel Tarde (1843-1904), and Sigmund Freud (1856-1939). Many of these theories are today tested or used to simulate crowd behaviors in normal or emergency situations. One of the main focuses in these simulation works aims to prevent crowd crushes and stampedes.
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Crowd psychology in the context of Stock market crash
A stock market crash is a sudden dramatic decline of stock prices across a major cross-section of a stock market, resulting in a significant loss of paper wealth. Crashes are driven by panic selling and underlying economic factors. They often follow speculation and economic bubbles.
A stock market crash is a social phenomenon where external economic events combine with crowd psychology in a positive feedback loop where selling by some market participants drives more market participants to sell. Generally speaking, crashes usually occur under the following conditions: a prolonged period of rising stock prices (a bull market) and excessive economic optimism, a market where price–earnings ratios exceed long-term averages, and extensive use of margin debt and leverage by market participants. Other aspects such as wars, large corporate hacks, changes in federal laws and regulations, and natural disasters within economically productive areas may also influence a significant decline in the stock market value of a wide range of stocks. Stock prices for corporations competing against the affected corporations may rise despite the crash.