Central bankers are only human
I’ve come to the realisation that central bankers, rather than being paragons of economic rationalism, are actually human beings. They are subject to the same behavioural biases as the rest of us, and make decisions in this context. One of the more significant biases that affects decision-making is loss aversion. We all experience losses more intensely than gains and will react to the prospect of a loss more intensely than the hope of a win. This partly explains observed patterns in the stock market, which are often subject to rising trends and sharp falls. As markets go lower, investors tend to switch their focus to potential losses, which have greater emotional impact than the prospect of gains, and they head for the exit in a panic.