Table of Contents
Introduction: The Psychology of Panic and Bank Runs
Bank runs are a phenomenon that has been a nuisance in the banking sector for more than two hundred years. It is a situation where a number of customers withdraw their money from a bank contemplating the institution to be insolvent. Bank runs are deadly especially to the bank and the entire economy since they tend to erode the public's confidence in the financial system and thus reduce the availability of credit. This paper aims at exploring the psychological basis of panic in order to explain the causes and effects of bank runs.
The Anatomy of a Bank Run: Triggers and Causes
Bank runs can be initiated by a number of factors, including: Propaganda, the media and other reports, and changes in the economy. Sometimes, the cause of the crisis is the client's distrust of the bank and its ability to redeem its obligations. Such lack of confidence may be due to poor performance, deterioration in the financial position, or lack of disclosure in the management of the bank. The discovery of the Bank Runs is the perception of risk. When the depositors are scared that their money is in danger then they tend to withdraw their money from the bank. This perception of risk can be influenced by the following; the news, the rumors, and the actions of other clients.
The Impact of Social Influence and Group Dynamics on Bank Runs
Social influence and group dynamics can also play a significant role in bank runs. When depositors see other people withdrawing their money from the bank, they may decide to follow suit. This behavior can then intensify to a bank run where more and more people withdraw their money.
Group dynamics can also cause bank runs. When the clients feel that they are not alone and that there is a big group of people who are in the same boat, they may decide to panic and withdraw their money. This group identity can be encouraged by the media and other reports.
