In the paper, “panic selling” is defined as a 90% decline in the balance of an investment account, of which at least 50% was due to the investor choosing to sell off assets.
Say you had $100,000 invested, and the stock market went down 20% — leaving you with $80,000. But then you started to freak out; “what if the market keeps falling?” So, you sell another $70,000. Leaving you with just $10,000 left invested and $70,000 in cash.
Despite its name, often, there appears to be a strategy behind the concept of panic selling. Many investors engage in panic selling to preserve capital and avoid further losses.
During the 2008–2009 financial crisis, the U.S. stock market dropped by 40%. Some investors looked at what was happening in the economy and their portfolios and made a panic sale, liquidating 90% or more of their portfolios. If they did this when the market was down 20%, they avoided the further losses coming in the months ahead.