What Is Jekyll and Hyde?

The phrase "Jekyll and Hyde" employs a literary reference to describe a stock market that appears to have a split personality, mixing good and bad character traits. Jekyll represents the good in a market. It is benign, predictable, and conducive to trading gains. Hyde is a bad character who is volatile, unstable, unpredictable, and generally dangerous to investors. Because the stock market is susceptible to the full range of human emotions, Jekyll and Hyde make frequent appearances on Wall Street.

Understanding Jekyll and Hyde

In Robert Louis Stevenson's The Strange Case of Dr. Jekyll and Mr. Hyde, Dr. Jekyll, a decent and congenial scientist, unleashes his dark side, Mr. Hyde, through unwise experimentation on himself 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. A calm and predictable market can suddenly and inexplicably be torn apart by a frenzy of negativity. Like the characters in Stevenson's novel, market participants and observers are left baffled about this strange behavior and at a loss to explain its underlying causes.

Evolution of Behavioral Finance

An economist would say that strange market behavior is at odds with the efficient market hypothesis, which maintains that the price of any stock at any given time will always be the same as its fair market value because it will be based on all of the information then available.

A relatively new field of theory, behavioral finance, attempts to explain how rational decision-making, or a lack of it, contributes to manic swings in a market. Collective human behavior connected to greed and fear causes bubbles to form and then suddenly pop.

The Jekyll and Hyde syndrome might illustrate an aspect of behavioral finance.