What Is Jekyll and Hyde?
Jekyll and Hyde is a pop culture reference to a famous novel that is sometimes used to describe a stock market with a split personality. Jekyll represents the "good" in a market - benign, predictable and conducive to trading gains, while Hyde is the "bad" character who is volatile, unstable, unpredictable and causes harm to investors. Because the stock market is susceptible to the effects of the range of human emotions, Jekyll and Hyde can make frequent appearances.
Understanding Jekyll and Hyde
This term is derived from R. L. Stevenson's "The Strange Case of Dr. Jekyll and Mr. Hyde." Dr. Jekyll, on the surface a decent and congenial scientist, unleashes his dark side, nicknamed Mr. Hyde, through self-experimentation in a laboratory. Although Jekyll and Hyde have contradictory natures, they are one and the same person. The embodiment of good and evil in one man is at times paralleled in the stock market, where the behavior of pleasant and calm gains are suddenly and inexplicably in the moment shredded by painful and volatile losses. Like the main characters in Stevenson's novel, market participants and observers are left wondering about the strange behavior and the underlying causes.
Evolution of Behavioral Finance
Strange market behavior is at odds with the efficient market hypothesis, which implies that markets should be orderly. A relatively new field of study, behavioral finance, attempts to explain how rational decision making, or lack thereof, of human beings can contribute to manic swings in a market on any given day, or how collective human behavior connected to greed and fear can cause bubbles to form and inflate and then suddenly pop, leading to panic.