Last week, investment blogger Barry Ritholtz mentioned a 2021 study about "freaking out" — a term used to describe when investors "intentionally and abruptly" sell a "substantial portion" of their stock assets during a sharp downturn. That behavior is also known as "panic selling."

It's an interesting study. Using anonymized data provided by "one of the largest brokerage firms in the United States," researchers at the Massachusetts Institute of Technology examined transactions from more than 650,000 individual investment accounts (active at the end of 2015) to see if they could identify patterns. Many households have more than one investment account, so those roughly 650,000 accounts represented about 300,000 households.

This type of study uses complex formulas for crunching data, but let's "cut to the chase." Here are some of the findings:

We counted 36,3774 panic sells by 25,852 household investors (9.0% of all households) across a period of 13 years between January 2003 and December 2015....

Of households with at least one panic-selling event, 21,706 of them did so once within our sample period, while 3,081 did so twice.

Those numbers are much lower than I would have suspected, especially given that the years covered by the data included the Great Financial Crisis of 2008-2009. For only 9% of household investors to "panic sell" over those 13 years is remarkable.

The researchers also examined if and when panic sellers returned to the market. About 60% came back within five months, and slightly more than 10% came back within 10 months. But nearly a third (30.9%) never returned at all, at least not before the end of the study period.

This suggests that when investors "freak out" and sell, it's difficult for a sizeable percentage of them to put money at risk in the market again. They head to the sidelines and never get back on the field.

I'll state the obvious: Such investors would benefit from following a mechanical strategy (such as those offered by SMI) in which sell-and-buy decisions flow from a data-driven, rules-based process. Absent such a strategy, emotions will rule — and sometimes, emotions can paralyze an investor into inaction.

The profile of a panic seller

The researchers found that the investors who were most likely to "freak out" tended to match a particular profile.

People [over the age of 45 had] a heightened tendency to make panic sales.... Younger investors [were] less likely to make panic sales by a wide margin....

Investors who are married [were] more likely to freak out...than other groups.... Males [were] slightly more likely than females to freak out [during periods of high financial stress]...."

[As for dependents,] there seems to be a positive correlation between the likelihood of panic selling and the number of dependents....

Those findings are understandable. A man over age 45, especially one who has dependents and feels a responsibility to protect the family finances, likely finds it more emotionally challenging to endure a downturn than a young person with no family responsibilities and a longer time horizon.

But two more findings from the study are puzzling. Here's one:

The likelihood of panic sales...[was] most pronounced when the investor [had] self-declared "good" or "excellent" investing experience.... Those who declared themselves to not have investment experience [were] less likely to panic sell.

The other strange finding is this: Declaring oneself a member of the clergy, a business owner, or an executive "[increased] the likelihood of panic selling."

The question of why

Why do people panic sell? Does fear of loss overcome them, or is it more complex than that? The MIT researchers concede that "the problem of causation cannot be addressed with the data we have. Therefore, our study does not address why investors panic sell."

Have you ever "freaked out" in the face of a downturn? Was it fear that caused you to sell, or were there more "rational" considerations? And would you make the same choice if you had it to do over again?