NEW YORK -- The headlines say the financial crisis is behind us. The Dow is back to pre-financial crisis levels. Layoffs are the slowest since the financial crisis, and car sales the highest since the financial crisis.
So why are Americans still too scared to get back in the stock market?
Because all they hear is "financial crisis."
Every comparison to 2008, even a comparison that's supposedly good, stirs memories of 2008. For some people, it rekindles the fear of losing a job or a house. For others, years of retirement savings swallowed by a plunging stock market.
So say the experts in the budding field of behavioral finance. Professional investors and money managers may be baffled that Americans are shaking off the good news. But people with a background in psychology are hardly surprised.
A broad measure of the stock market, the Standard & Poor's 500 index, is up more than 20 percent from last October. The index has more than doubled since March 9, 2009, the low point for stocks during the Great Recession.
But everyday investors refuse to jump in. They pulled $19 billion from funds that invest in U.S. stocks in December, according to the Investment Company Institute, and $2 billion more in January.
"In the old days, if there was a market rally, people would call and ask to put more money in. They felt they were missing the party," says Deborah DeMatteo, an independent wealth manager at 10-15 Associates in Goshen, N.Y.
This time, investors seem more than happy to miss the party.
"Now, people call and ask, `When is it going back down?'" DeMatteo says. "There's a sense of doom."
What are they thinking? It's a question fit for a shrink.
Market psychology is still psychology, which is why Wall Street banks and investment firms pay people like Richard Peterson, a psychiatrist with a medical degree from the University of Texas, to help make sense of it.
A variety of emotions and thought processes are keeping Americans out of the stock market, Peterson and other experts say. The memory of 2008, when the Dow Jones industrial average swung wildly by hundreds of points a day, is probably No. 1.
The tumult of that year stamped itself in many people's brains. Like survivors of a devastating earthquake, they carry those events with them.
"A traumatic memory gets seared in the brain," Peterson says.
In this case, the wound is easily irritated. News that reminds people of the financial crisis – debt problems in Europe, a sudden swing in the market – sets off the same emotions of fear or anger. Getting your fear button pushed that often is exhausting, Peterson says.
People eventually tune out to save their sanity.
"Fear is still with us," says Meir Statman, a professor of finance at Santa Clara University in California and a leading expert in behavioral finance. "We live as if it's still 2008."
Statman sees a few other impulses at work. One is a habit of thinking that selects an event and uses it as the basis for understanding everything else. "We look at something and ask, `What is this similar to?' Statman explains.
In good times, this leads to the folly of "return chasing" – expecting an investment, sports team or pickup line to be successful simply because it proved successful in the past.
People usually do this kind of extrapolation from recent events. But Statman suspects many are using the more distant memory of 2008 because it feels closer. "I think that what's vivid in people's minds is not last year but 2008," he says.
As a result, they respond to events as if it were September 2008 and Lehman Brothers were about to collapse all over again. In this case, Statman says it's not fear that's driving people but an error of reasoning.
Last summer, for instance, a fight over raising the federal government's debt limit led Standard & Poor's to strip the United States of its top-flight AAA rating. The markets went wild. For the month of August, the Dow swung an average of nearly 2 percent every day.
Harvey Rowen, chief investment officer at Starmont Asset Management in San Francisco, says clients called and wanted to cash everything out. "I'd tell them, `You're going to take a loss,'" he says. "And they'd say, `I don't care. I want out.'"
One client called with a demand to sell all his investments. He wanted Starmont to use the cash to buy gold bars, silver bars and Swiss francs and then cart them to his house. "We managed to talk him out of it," Rowen says.
Another habit that Statman sees at play is the confirmation bias. It's often used as a way to help explain the widening political divide in the U.S. between Democrats and Republicans.
Say you believe that the federal government's debts will cause the U.S. to go the way of Greece. Instead of looking for information that challenges this view, you stick to news reports that confirm your opinions.
"If you have evidence that goes against your beliefs, you dismiss it," he says.
Statman says it seems some people are looking to confirm a "doom and gloom" view of the U.S. economy. Point out that the economy grew at a 3 percent rate in the last quarter of 2011 and they'll change the subject.
Their view, he says, is: "This country is going down the tubes."