Let us look at the biggest declines. Of the major countries’ indexes, the biggest crash was in India, where stock prices fell 16.9% from May 10 to May 22. The debacle on the other side of the globe was almost as big and the peaks and troughs were within a day or two of those in India: in Argentina, stock prices fell 16.1%, in Brazil, they fell 14.7%, and in Mexico, they fell 13.8%.

European markets also suffered large losses. In Sweden, stock prices fell 15.2% between May 9 and May 22; over nearly the same period, prices fell 9.7% in Germany , 9.4% in France and the United Kingdom, and 9.3% in Italy. Likewise, in Asia, stock prices fell 11.5% in Korea, 9.3% in Hong Kong, and 8% in Japan from their respective peaks to troughs over very nearly the same time period.

Many commentators try to tie such events to developments the United States. But US stock prices fell only 5.2% between May 9 and May 24. Nor does China appear to be behind the global decline, since stock prices there actually rose during this period.

Economists’ standard explanation revolves around monetary policy. In the wake of the great deflation scare of 2003, central banks around the world cut interest rates, setting off speculative booms in both stock and housing markets. But now, according to this view, rising interest rates are beginning to bite, which portends further declines in asset prices.

There is certainly an important element of truth in this argument. The US Federal Reserve did indeed raise rates on May 10, and its chairman, Ben Bernanke, indicated then that there may be further rate increases in the future. Worsening US inflation data were reported on May 17, suggesting that further monetary tightening is in store.

Economists like to view the world as logical and manageable, which implies that they understand what is happening. But, in doing so, they often exaggerate central banks’ role. Indeed, the US rate increase was just one in a series of rate hikes – the 16th in a row. No other major central bank raised rates after the stock market drops began in May until June 7- 8, when several did (the European Central Bank, India, South Korea, South Africa, Thailand and Turkey)

Another factor is the price of oil, which rose 24% from March 22 to May 2, setting all-time records along the way. Surely, this was a major event that would plausibly affect stock markets all over the world. Oil price increases have been a culprit in virtually every economic recession since World War II.

Still, the oil price increases do not correspond to the time interval in mid-May when stock market indexes fell most sharply. To argue that oil price increases caused the stock market declines presupposes a time lag of several weeks.

But stock markets are not very logical, and there could be a lagged response to the oil price shocks. As with any other prices in financial markets, an increase attracts attention. When oil prices rise quickly, people watch the news related to oil prices and talk to each other more about oil prices, hence creating heightened sensitivity to this news.

The crisis in the Middle East is tied to oil prices, and it dominated the news in May. Ominous signs and strong language used by various political figures were possibly amplified in investors’ minds by the oil price increases. On May 8, Israeli Vice Premier Shimon Peres, reacting to hostile statements by Iranian President Mahmoud Ahmadinejad, said that “the president of Iran should remember that Iran can also be wiped off the map.”

Similarly, near the beginning of the May stock market tumble, Ahmadinejad visited Indonesia, the world’s most populous country with a Muslim majority, and newspapers reported on May 13 that he had received a standing ovation from students at two of the country’s top universities. This story might have been interpreted as evidence that Ahmadinejad’s brinkmanship on the nuclear issue was paying off for him politically, fueling a perception that the tense situation in the Middle East might lead to even higher oil prices.

These news stories may seem far more remote from the stock market than is monetary policy. But public reaction to them, together with recent oil price increases, may well account in good measure for the change in market psychology. Attitudes toward risks change over time, and events like Ahmadinejad’s and Peres’s remarks can precipitate such changes. So, while these things happen in ways that are hard to quantify, maybe analysts should pay attention to the words of Ahmadinejad just as carefully as they do to those of Bernanke in trying to understand the direction of the world’s stock markets.

Economists might not like to focus on the public mindset and how it interacts with price changes, world news stories, and speculative dynamics. After all, doing so implies that economic events are less predictable (and economists less omniscient) than they like to imagine. But such a focus makes intuitive sense. What is really on investors’ minds? Ahmadinejad is a charismatic figure; Bernanke is not. Ahmadinejad is embarking on an adventure; Bernanke is not. And, perhaps most importantly, Ahmadinejad is a destabilizing influence; Bernanke is not.

Indeed, whatever their ultimate cause, the mid-May drops in stock prices throughout the world are indicative of unstable market psychology. It is difficult to believe that they were related only to opinions about likely monetary policy, and not to larger and deeper issues, including such things as energy and political tension, that underpin the performance of the world economy.

Robert J. Shiller is Professor of Economics at Yale University, Chief Economist