From The Dot-Com Bubble To The 2020 Crash: Behavioral Patterns That Repeat

Every time the stock market crashes, it feels like something new. A new reason. A new trigger. A new crisis. But if you look closer, investor behaviour during these events follow some patterns.

The emotions we feel – like excitement during rallies or panic during crashes – have repeated for decades. From the dot-com bubble in the late 1990s to the sharp fall during COVID-19 in 2020, the triggers are different, but the market crash psychology is similar.

In this article, we’ll take a closer look at three major market crashes, the emotions they triggered, and the reactions they can. We’ll also learn how we can attempt to break these patterns and make more rational investment decisions.

• Table of contents

• The dot-com bubble (1995–2000): Greed fuelled by innovation
• 2008 global financial crisis: Fear, panic & overreaction
• The 2020 market crash: Uncertainty in a pandemic era
• Common behavioural patterns that repeat
• The psychology of investing: What drives these patterns?
• Impact of these behaviours on investment portfolios
• How to break the cycle: Building a rational investment strategy
• Lessons for long-term investors

The dot-com bubble (1995–2000): Greed fuelled by innovation

The internet was the big new thing in the late 1990s. New tech companies were born every day and investors believed they would all become the next big success story.

What happened?

• Investors poured money into any company with “.com” in its name, even if the fundamentals were not strong.
• Stock prices soared and some people made quick money.
• Many neglected risk and chased hype.

The outcome:

• In 2000, the bubble burst. Many tech stocks crashed.
• Millions of investors lost large sums.
• The dot-com bubble investor behaviour was a classic case of greed and herd mentality.

2008 global financial crisis: Fear, panic & overreaction

In 2008, the world faced a banking and housing crisis. Big banks failed and credit markets froze. Investors didn’t fully understand what was happening, but they felt fear.

What happened?

• Stock markets around the world crashed.
• People sold their investments in panic, fearing total collapse.
• Even those with long-term plans pulled out money.
  The outcome:

• Many who sold at the bottom missed the recovery in the years that followed.
• The financial crisis was triggered by events, but fuelled by panic.

Also Read: How does investor behaviour impact market conditions?

The 2020 market crash: Uncertainty in a pandemic era

When COVID-19 hit, global markets fell sharply. Businesses closed, jobs were lost, and life paused. Investors reacted with the same fear seen in earlier crashes.

What happened?

• Markets crashed in March 2020
• Many sold in fear, thinking there would be no recovery.
• Markets bounced back faster than expected and went on to hit new highs.

The outcome:

• Those who stayed invested or used the dip to buy more saw gains in 2021.
• Those who sold missed the rally.
• Once again, the market crash psychology repeated.

Common behavioural patterns that repeat

Despite different triggers, investor emotions often follow a similar path. Let’s look at some common patterns.

1. Herd behaviour

Human beings tend to follow the crowd. If everyone is buying, many of us feel that we should too. If everyone is selling, we panic and sell.

• During rallies: “Everyone is making money—I should invest now.”
• During crashes: “Everyone is getting out—I should sell too.”

2. Overconfidence

After a few good investments, we feel we can’t go wrong.

• We start taking big risks.
• We believe we can time the market.
• We ignore advice or data that says otherwise.

3. Loss aversion

We dislike the pain of losing money more than we like the gain of making it.

• This makes us sell quickly during losses.
• Sometimes, we hold onto bad investments too long just to avoid realising a loss.

4. Recency bias

We tend to place more importance on recent events than longer-term patterns.

• If the market is rising, we think it’ll never stop.
• If it’s falling, we feel it will never recover.

While not every investor displays each of these behaviours, most of us have some bias. These biases lead us to make emotional decisions rather than logical ones.

The psychology of investing: What drives these patterns?

Our brains are built for survival. This is why we respond emotionally to market moves, whereas investment requires a totally different approach.

Key psychological triggers:

• Fear and greed: These are the strongest forces in investing. Fear makes us sell prematurely, greed makes us buy at peaks.
• Social proof: We follow what others are doing, even if it doesn’t suit us.
• Need for control: Investing feels uncertain, so we make quick decisions just to feel in control.

Understanding the psychology of investing helps us avoid falling into emotional traps during ups and downs.

Impact of these behaviours on investment portfolios

So, what happens to your portfolio when you act on these emotional patterns?

Negative effects:

• Poor timing: You often buy high and sell low, which is exactly the opposite of what you should do.
• Overtrading: Constantly switching investments increases costs and can reduce net potential returns.
• Unbalanced portfolio: You may end up with investments that exceed your risk appetite or are too conservative for your goals.

How to break the cycle: Building a rational investment strategy

Being emotion-free is impossible. However, being aware of your emotions can help you plan around them.

Some simple steps to increase rational decision-making:

• Set clear goals: Know why you’re investing. Your goals can keep you focused during market swings.
• Consider SIPs: A Systematic Investment Plan (SIP) helps you invest regularly, without worrying about timing the market.
• Diversify: Don’t put all your money in one stock or fund. Spread it across asset classes like equity, debt, and gold.
• Review, don’t react: Check your investments regularly, but don’t make changes based on fear or news headlines.
• Use an SIP calculator: This helps you see how small, regular investments can potentially grow over time, which can motivate you to stay invested for the long run.

Lessons for long-term investors

Looking at the past, we see that markets typically recover over time and grow further (Past performance may or may not be sustained in future). Panic selling and buying in greed can often exacerbate these crashes. Here’s what long-term investors should remember:

• Crashes are part of the journey.
• Time in the market beats timing the market.
• Emotions are temporary, goals are long-term. Stay focused on why you started.

Also Read: What is behavioural finance?

Conclusion

From the dot-com bubble to the 2020 crash, history shows us that markets may change, but human behaviour tends to follow a pattern of fear, greed, and panic. Recognising these investor behaviour patterns is the first step toward strategic investing. By using tools like SIPs, setting clear goals, and staying calm during chaos, you can potentially build wealth over time in a systematic and disciplined way.

FAQs

What are the most common investor behaviours during a market crash?

Investors often panic, follow the crowd, sell at a loss, or stop investing altogether. These actions are driven by fear and short-term thinking.

Why do similar behavioural patterns repeat during every financial crisis?

Because human psychology doesn’t change. Emotions like fear, greed, and herd behaviour are natural responses that surface in every crisis.

How can investors avoid making emotional decisions during volatile times?

Have a clear plan, invest through SIPs, diversify your portfolio, and avoid reacting to daily market news. Stay focused on your long-term goals.

What lessons can we learn from the dot-com bubble and the 2020 crash?

Chasing hype or reacting in fear usually leads to losses. Staying invested, avoiding panic, and thinking long-term often results in better outcomes.

How do Systematic Investment Plans (SIPs) help in managing behavioural biases?

SIPs remove the need to time the market, reduce emotional decisions, and encourage discipline. An SIP calculator can help you stay motivated by showing the potential of investing for the long haul.