Why our brains are hard-wired for bank runs like those that toppled SVB, Signature

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The panic-induced customer withdrawalsthat implodedSilicon Valley Bank and Signature Bank — and sent shock waves through financial markets and the broader banking system — offer an acute lesson in human psychology.

In this case, an understandable «behavioral bias» led to bad financial outcomes, experts said.

«Psychology injects a lot of extra risk into the world,» Harold Shefrin, a behavioral finance expert and finance professor at Santa Clara University. «And we experienced that risk last week — from Silicon Valley Bank and the reactions on the part of its depositors.»

Our brains are hard-wired for a bank run.

Humans evolved as social creatures that thrive in groups, said Dan Egan, vice president of behavioral finance and investing at Betterment. As such, we care a lot about what others think and do.

So, we run if we see others running — a handy impulse when it meant life or death for early humans fleeing bears and lions, but which may not make sense in the modern era, Egan said.

Last week, bank customers saw their peers run for the exits; sensing danger, that herd mentality meant they also rushed to withdraw their cash. But banks don't keep customer deposits on hand; they generally invest or lend them to make money. SVB and Signature didn't have enough cash to meet redemptions.

Fear among the collective group became a self-fulfilling prophecy: It triggered a bank failure, the very problem they initially feared, Egan said.

More from Personal Finance: What small businesses should look for when choosing a bank What Signature Bank, Silicon Valley Bank failures mean for consumers and investors What to know about FDIC insurance

There are firewalls against this kind of behavior. The Federal Deposit Insurance