Ever seen an Ostrich with its head buried deep in the sand? There is a popular belief that the Ostrich buries its head in the sand, when in danger. It thinks that if it cannot see others, others can’t see it either.

That Ostrich is an example of Normalcy Bias. It happens to people who are facing a disaster. It causes people to underestimate the chances of the occurrence of the disaster. They think “it has not happened before, it will not happen again”, and live in denial. The result? People end up with less-than-adequate preparations for the disaster. And they cannot cope with the changed reality either.

Disaster planning and normalcy bias
Whenever a natural calamity warning hits, the first reaction of most people is to deny the impact of such a thing. Most people refuse to evacuate, and prefer staying indoors. The experiences of the Federal Emergency Management Authority (FEMA), in the United States, suggest so. The cyclone Katrina, and the more recent cyclone Isaac didn’t seem to move the people out of their homes.
The holocaust
In Germany, during 1930s, the warnings were all too clear after Hitler came into power. Discriminatory laws were getting passed, Jewish businesses were getting boycotted and the Jewish houses were getting marked with a yellow star. History says that even when there was mob violence happening against many Jewish businesses, the community chose to stay in Germany – even the ones who could easily afford to get out of Germany. Finally people were getting rounded up, and being taken away to concentration camps, yet the paralysis induced by this effect made sure that the masses did not actively try to run away.
In stock markets, this is manifested in such last minute desperate justifications like “No country has ever defaulted before, how can this happen?” (heard just before Russia went bankrupt  in 1998), or “Real estate prices never fall down, this is an anomaly” (United States, before the crisis thanks to which you and I are in our sad jobs right now).  Minor forms include, “this cannot be true, this stock cannot fall from 400 to 40”. When faced with the extreme crashes, almost everyone fails to react. This leads to greater losses than they had already incurred.
The Idea is Simple. It could Happen to You. So save yourselves at the first sign of disaster.
Get out of that stock which has lost 10%
“This cannot happen” does not hold true for Stock Markets. Anything can, and will happen.