Stock Market Volatility: Are You Thinking for Yourself?

Oct. 31, 2008— -- Election Day is just four days away, capping off a month of daily poll results and major stock market swings.

Is mob mentality to blame?

"There is such panic selling and fear driving the selling that's going on right now," Jason Weisburg, a New York Stock Exchange trader for Seaport Securities, told ABC News.

President Bush told Americans the day after the Oct. 7 stock market plunge that saw the Dow drop 1,400 points that it represented "more than a trillion dollars in losses."

A trillion dollars in losses is a lot of money. Those companies continue to make computers and cars and other goods despite the panic that set in.

"What it really represents is the market changing its mind radically, and changing it very fast," said James Surowiecki, author of the best seller "The Wisdom of Crowds."

Last spring, he told "20/20" that crowds of people can be incredibly intelligent, "even though no one person in the crowd knows everything. If the crowd is big enough, and it's diverse enough, you just have access to so much more knowledge."

Yelling 'Fire' in the Stock Market

An example of crowd wisdom is the betting site Intrade.com, where the collective wisdom of thousands of people trying to win money helped Intrade correctly predict the Oscar winners for best director and best picture -- and so far, election results -- more accurately than any pollster.

The higher the price of a candidate, the more likely that he will win.

But if these bettors are accurate, then what's happening on Wall Street?

"There are a lot of times when people are not wise, when they are crazy," Surowiecki said.

Especially when they are scared.

Some financial experts and analysts have warned of a collapse similar to the Great Depression.

It's a madness akin to screaming "Fire!" in a crowded theater.

"Traders are just bombarded by information about what other traders are doing," Surowiecki said. "So you cannot go through the day without just having people basically yelling in your ear -- this is what other people think, this is what other people are doing, this is how afraid they are."

"And that," he said, "just makes it very hard for people to think for themselves."

Surowiecki said groups are only smart when each individual is thinking for him or herself.

That's what happens on Intrade.com where today John McCain was selling for 16 cents compared with 83 cents for Barack Obama, making him the big favorite.

Has the Public Made Up Its Mind?

The country will find out Tuesday if the folks on Intrade.com are correct again, but political opinion has been much steadier than beliefs about stocks.

Despite small upticks, such as after McCain's choosing of Sarah Palin as a running mate, the Arizona senator has remained consistently behind Obama in national polling.

After Sarah Palin was first announced as the GOP's vice presidential pick, the public liked her, pollster Andy Kohut, president of the Pew Research Center, said. But that image that first attracted voters to Palin started to tarnish after her interview with CBS' Katie Couric when she struggled with some questions, including being asked for examples of McCain's pushing for more regulation.

"Three weeks later, we're finding the public saying, no, she's not qualified, and we really don't care for her," Kohut said.

"Not that many people watched the Couric interviews," Kohut continued, but "an awful lot of people said they had heard about it." This kind of news about a candidate or against a candidate gets through in many ways."

The Internet, word of mouth and late-night TV help spread the word.

Kohut said Obama also got a boost from the three debates.

"Debates made a big difference," he said. "They made the public more comfortable with Barack Obama, less comfortable with John McCain. More people said, 'Hey, he may be too old for office.'"

Despite the media frenzy over the presidential campaigns, political preferences have remained relatively steady. The latest ABC News/ Washington Post daily tracking poll shows Obama leading McCain, 52-44.

Historic Bubbles

It's a contrast with Wall Street, which has endured bubbles and crashes.

"The fundamental characteristic of bubbles and crashes -- panics like we're seeing now -- is that people become much more concerned about what other people think than about what they themselves think," Surowiecki said.

It doesn't help either when even smart, rich people are alarmed.

Commodities trader and Fox Business Network contributor Eric Bolling said the market can be like a pendulum.

"There is panic, there's fear," he said. "You know, things swing between fear and greed."

You're jumping in, he's jumping in, your other neighbor's jumping in," he said, "and that's pushing prices up, and that's pushing that pendulum to the greed side."

It's like keeping up with Joneses. If one neighbor sees another with a brand-new, more expensive car and he explains that he got it by buying stock or real estate, it's not uncommon for that neighbor to try that for himself.

"As you do it, and your other neighbor, and Bill does it, and Steve does it, and Sue does it, and Jane does it ... you push prices up," Bolling said. "Bull markets are made of the greed. The problem is, when things start to slow down a little bit, when you can't rent that condo that you just bought. And that pendulum starts to swing back the other way."

When Tulips Were All the Rage

But bubbles aren't anything new. It happened when English investors got excited about trade with the New World.

"The South Seas represented this tremendous investment opportunity, gold, trading businesses, various kinds of spices," Surowiecki said.

Even brilliant people, like Issac Newton, who developed the law of gravity, became convinced prices would only go up, and they lost everything.

"Isaac Newton did lose all of his money in a bubble, it is true," Surowiecki said.

"I can calculate the motions of the heavenly bodies," Newton reportedly said, "but not the madness of people."

"It requires a certain kind of makeup to really be able to remain impervious to what everybody else is doing," Surowiecki said.

There was once even a tulip bubble in the 17th century.

"That kernel of an idea -- tulips are economically valuable, people are willing to pay more for tulips that are more unusual -- inflated into a massive and incredibly destructive bubble," Surowiecki said. "People using the price of a house to buy a single tulip bulb."

It Could Be Worse

Just 10 years ago, there was the dotcom bubble.

Tiny, unprofitable companies like Pets.com and Webvan.com were sought after by investors. If you didn't own stock, you were missing out.

"The longer they last, the harder they become to resist because what they do is, they start to convince you that they're real," Surowiecki said, "and that was really true with the bubble, with the tech bubble."

The dotcom bubble popped as well with the collapse of one high-profile Internet company after another.

But the nation recovered from that and the market boomed again. So before the public panics about the Dow crashing down to 8,000, remember it was below 1,000 in 1982.

"We're still up more than a thousand percent in just the time since I was actually in elementary school," said Fox Business Network anchor Cody Willard, 36.

"Relative to where we were six months ago, things are a lot worse than they were. But, relative to where we were, say, 25 years ago, this is still an amazing time and place to be alive. In fact, it's the most amazing time and place to be alive in the history of the planet," Willard said. "We still have 94 percent of all the people in this country who want a job have one."