As we get ready to watch markets on the other side of the globe open, it might be helpful to think about how we think. Our brains use both the social and emotional context of a situation to decipher its true meaning. But what happens when something completely new happens?
For all practical purposes, no one really knows what a downgrade of US debt means. We might be able to say it means higher interest payments or certain entities having to sell US debt but in reality, because this hasn’t happened before (at least not in any recent institutional memory), we can’t have that context that is so important to judgment calls under uncertainty. This might mean that nothing much will happen on the opening in a few hours – everyone will be looking around to see how other people perceive it.
Of course, the knee jerk reaction is to think the markets will sell-off. I hate to go out on a limb …. but …. I suspect that at first at least (i.e. the first 12-24 hours) won’t be /that/ clear. The context – both social and emotional – has yet to be created.