Edited by Francesco Forte, Ram Mudambi and Pietro Maria Navarra
Chapter 11: The role of memory in modeling social and economic cycles of extreme events
Forecasting the future is one of the most important problems of society. Among others, an important target is the behavior of a market or a population which, at times, seems to ignore the warnings of the economists or the medical doctors or the sociologists and reacts irrationally to the extremely varied events of the world. Examples are many: the fall in air passenger numbers after a terrorist attack, the panic after a fall of the stock market index, the consternation after the discovery of the spreading of an epidemic disease, such as AIDS, etc. The importance of psychology on the markets is clearly shown by the regret theory, well described in the book of the economist Anand (1993) where regret is considered as investors' fear of regretting their investment decisions. This phenomenon is well known in the real estate business as the buyer's remorse. In quiet periods people act rationally with tactics, subtle strategies and finesse, but when facing an emergency the population does not always react rationally, rather confusion, panic and sorrow are frequent results of people acting as a mass. It is the memory of past experience and of plans that were previously proved successful that will soon induce the people to think rationally again and act accordingly. In these processes, however, there is an important rational component represented by the memory.
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