TEXT OF STORY

KAI RYSSDAL: Warren Buffett is a rich, rich man. He got that way by being really quick on the uptake and seizing opportunities when they presented themselves. The CEO of Berkshire Hathaway said yesterday after the markets closed that he’s going to pump $5 billion into Goldman Sachs. Right, the Goldman Sachs that’s right at the center of the turmoil on Wall Street.

Question is, will that inspire other investors to do the same thing? Put money in instead of taking it out. If you think about it, that’s kind of the point of that $700 billion government bailout.

Marketplace’s Jeremy Hobson explains Market Psychology 101.

JEREMY HOBSON: At a hearing this morning on Capitol Hill, Senator Charles Schumer asked Fed Chairman Ben Bernanke if the bailout really has to cost $700 billion. Wouldn’t $150 billion be enough to assure the markets for the moment? Here’s Bernanke’s answer:

BEN BERNANKE: Senator, you asked me my opinion as an economist. Unfortunately, this is a matter for psychology.

CHARLES SCHUMER: Right.

OK, so let’s diagnose the patient.

About a block away from the New York Stock Exchange, you’ll find Peter Cardillo. He’s chief market economist at a boutique brokerage house called Avalon Partners.

PETER CARDILLO: I think the markets need to be assured that this is not going to be the end of the financial systems as we know it. I think the market needs to be assured that we’re not headed for a deflationary period.

Cardillo says $700 billion would be a nice dose of Prozac for the credit markets. And get people to start lending to each other again.

But Professor Ravi Dhar, who teaches investor psychology at Yale, says you can’t blame everything on psychology.
After all, there are some fundamental problems with the market. But he says psych does figure in when investors start making decisions based solely on what everyone else is doing.

RAVI DHAR: The market becomes manic depressive. You know, you have 500 points one day, where you assume that once the government comes in, things will be all fine. The next day, the market drops 400 points and says that maybe this won’t solve the problem or maybe tells me that it’s far worse than it is if the government is going to come in and spend all this money.

Dhar says the best cure for that is more transparency so investors can make more rational decisions.

In New York, I’m Jeremy Hobson for Marketplace.