Barberis says his model accounts for this coincidence. A stocks that is overvalued, or that has a high level of uncertainty about its fundamentals, has high volatility. Realisation utility investors, who love volatility, will push its price up, but they will also trade it more heavily because volatile stocks are more likely to reach their liquidation point (the price where the investor is satisfied with the size of the gain) sooner.

But perhaps the most interesting application of the theory is in explaining the zeitgeist of the credit crunch: a drop in stock prices combined with a liquidity shock is the source of negative feelings.