This would be true if people always behaved like Econs, not Humans. In normal times, the mass market averages out irrational behaviour (and there's less of it when things are calm) - but, occasionally the herd stampedes. Perhaps it's better in these cases to slow the panic until things calm down and people start behaving more rationally again.
There are also cases where people individually rationally maximizing their individual financial interests is, collectively, devastating for society as a whole.
Continuous adjustment sounds great, but sometimes we get crashes, which aren't.
It's curious that there's only intervention in the markets when they're tanking. If the underlying reason for the intervention is to prevent irrational behaviour then where was the regulator when the price was going up like wildfire? Surely it should work both ways?
There are many, many regulations that limit the rise of the markets, the most obvious being the limits put in place on credit and margin. All Western governments intervene in the various stock markets, everyday. That's been true since at least the 1930s. The interventions are sometimes direct, but are more typically indirect.
These last 40 years there has been a movement afoot, especially in the English speaking nations, to weaken the controls that limit the spikes, up and down, in the market. There may be some advantages to this policy, but there are also many disadvantages.
Fair point. However, how do we know if that's better or not? Perhaps it's better for those who remain rational during a crisis to accumulate more wealth by enabling them to place bets opposite the stampede. When the next crisis happens, they'll own a greater percentage of the market, and will act to correct irrational behavior. By placing limitations on short selling, we are helping the irrational people at the expense of rational insightful people.
I dislike the idea of these market closures or limitations on short selling because it essentially implies that people can't be responsible for themselves and their own decisions. People have agency and can decide what's best for them. If that's following a herd or opposing the herd, so be it. Perhaps the world would be better off if our systems were designed to more fully embrace meritocracy, moral hazard, and responsibility for one's self.
My experience tells me that giving people more responsibility tends to help them grow: they make their own decisions and learn from them. Taking away that responsibility minimizes risk in the short term, but also minimizes growth and upside in the long term. Maybe this is true at a larger scale in our markets as well. Obviously it's hard to know for sure one way or another.
I have been in a theater when someone yelled fire. Most people ignored the person yelling fire, and looked around for fire and smoke. They took the absence of those things, and the fact that the person was a teenager, as indications that the person was being a jackass and ignored him. I doubt a theater of people will respond to someone yelling "fire" unless the person was an authority figure of some kind, like a uniformed theater employee or police officer. Perhaps a person who yells fire very persistently and credibly will prompt a reaction: a few people will get up and look around, or inquire, but most people will wait for more information, especially if they see no evidence of a fire, and see other people investigating the alleged threat.
(If anything, most people wait too long to flee from fires. They only begin to flee once the danger is imminent and nearby. This is often too late, given the ability of smoke to rapidly expand.)
The visceral experience of being in a threatening environment can rob people of agency to a degree, I agree. Panic can do that specifically. I'm not sure that sitting in front of a desk and watching numbers tick on the screen is the same kind of visceral panic on which we should give people a pass for making good decisions though. That's an intellectual panic, not a physical danger-based panic.
In any case, one question I'd ask is: how can we improve at this, as the human race? One way to improve is to allow there to be slight competitive pressures favoring people who are more rational. Over time, those folks will be more successful economically and will have a greater influence on the rest of the population. Over time we'll get better, an effect that will be lessened if we provide too many safety barriers.
Remember that meme started when theatres were very popular venues with huge crowds, which often used fire(!) to illuminate the live action on stage, and had no safe exits.
The phrase originally came from Schenck v. US[1], in which Justice Oliver Wendell Holmes, Jr. said:
The most stringent protection of free speech would not protect a man in falsely shouting fire in a theatre and causing a panic.
Few recall that Holmes used this argument to justify imprisoning a group of socialists for the crime of attempting to mail leaflets. These leaflets protested US involvement in The Great War and urged people to protest the draft.
There are also cases where people individually rationally maximizing their individual financial interests is, collectively, devastating for society as a whole.
Continuous adjustment sounds great, but sometimes we get crashes, which aren't.