Robert Shiller: 1987 Could Happen Again

Tyler Durden's picture

By Robert Shiller, first published in the NYT

Oct. 19, 1987, was one of the worst days in stock market history. Thirty years later, it would be comforting to believe it couldn’t happen again.

Yet that’s true only in the narrowest sense: Regulatory and technological change has made an exact repeat of that terrible day impossible. We are still at risk, however, because fundamentally, that market crash was a mass stampede set off through viral contagion.

That kind of panic can certainly happen again.

I base this sobering conclusion on my own research. (I won a Nobel Memorial Prize in Economic Sciences in 2013, partly for my work on the market impact of social psychology.) I sent out thousands of questionnaires to investors within four days of the 1987 crash, motivated by the belief that we will never understand such events unless we ask people for the reasons for their actions, and for the thoughts and emotions associated with them.

From this perspective, I believe a rough analogy for that 1987 market collapse can be found in another event — the panic of Aug. 28, 2016, at Los Angeles International Airport, when people believed erroneously that they were in grave danger. False reports of gunfire at the airport — in an era in which shootings in large crowds had already occurred — set some people running for the exits. Once the panic began, others ran, too.

That is essentially what I found to have happened 30 years ago in the stock market. By late in the afternoon of Oct. 19, the momentous nature of that day was already clear: The stock market had fallen more than 20 percent. It was the biggest one-day drop, in percentage terms, in the annals of the modern American market.

I realized at once that this was a once-in-a lifetime research opportunity. So I worked late that night and the next, designing a questionnaire that would reveal investors’ true thinking.

Those were the days before widespread use of the internet, so I relied on paper and ink and old-fashioned snail mail. Within four days, I had mailed out 3,250 questionnaires to a broad range of individual and institutional investors. The response rate was 33 percent, and the survey provided a wealth of information.

My findings focused on psychological data and differed sharply from those of the official explanations embodied in the report of the Brady Commission — the task force set up by President Ronald Reagan and chaired by Nicholas F. Brady, who would go on to become Treasury secretary.

The commission pinned the crash on causes like the high merchandise trade deficit of that era, and on a tax proposal that might have made some corporate takeovers less likely.

The report went on to say that the “initial decline ignited mechanical, price-insensitive selling by a number of institutions employing portfolio insurance strategies and a small number of mutual fund groups reacting to redemptions.”

An avalanche of sell orders exhausted traders in New York. Credit Maria Bastone/Agence France-Presse

The panic in New York spread to the Sydney Stock Exchange in Australia. Credit Fairfax Media

Portfolio insurance, invented in the 1970s by Hayne Leland and Mark Rubinstein, two economists from the University of California, Berkeley, is a phrase we don’t hear much anymore, but it received a lot of the blame for Oct. 19, 1987.

Portfolio insurance was often described as a form of program trading: It would cause the automatic selling of stock futures when prices fell and, indirectly, set off the selling of stocks themselves. That would protect the seller but exacerbate the price decline.

A car for sale after its owner lost money in the 1929 stock market crash.

The Brady Commission found that portfolio insurance accounted for substantial selling on Oct. 19, but the commission could not know how much of this selling would have happened in a different form if portfolio insurance had never been invented.

In fact, portfolio insurance was just a repackaged version of the age-old practice of selling when the market started to fall. With hindsight, it’s clear that it was neither a breakthrough discovery nor the main cause of the decline.

Ultimately, I believe we need to focus on the people who adopted the technology and who really drove prices down, not on the computers.

Portfolio insurance had a major role in another sense, though: A narrative spread before Oct. 19 that it was dangerous, and fear of portfolio insurance may have been more important than the program trading itself.

On Oct. 12, for instance, The Wall Street Journal said portfolio insurance could start a “huge slide in stock prices that feeds on itself” and could “put the market into a tailspin.” And on Saturday, Oct. 17, two days before the crash, The New York Times said portfolio insurance could push “slides into scary falls.” Such stories may have inclined many investors to think that other investors would sell if the market started to head down, encouraging a cascade.

Newspapers grappled with the biggest one-day stock market decline, in percentage terms, in Wall Street’s modern history

In reality, my own survey showed, traditional stop-loss orders actually were reported to have been used by twice as many institutional investors as the more trendy portfolio insurance.

In that survey, I asked respondents to evaluate a list of news articles that appeared in the days before the market collapse, and to add articles that were on their minds on that day.

I asked how important these were to “you personally,” as opposed to “how others thought about them.” What is fascinating about their answers is what was missing from them: Nothing about market fundamentals stood out as a justification for widespread selling or for staying out of the market instead of buying on the dip. (Such purchases would have bolstered share prices.)

Furthermore, individual assessments of news articles bore little relation to whether people bought or sold stocks that day.

Instead, it appears that a powerful narrative of impending market decline was already embedded in many minds. Stock prices had dropped in the preceding week. And on the morning of Oct. 19, a graphic in The Wall Street Journal explicitly compared prices from 1922 through 1929 with those from 1980 through 1987.

A graphic in The Wall Street Journal on the morning of Oct. 19, 1987, compared current stock trends with those of the 1920s

The declines that had already occurred in October 1987 looked a lot like those that had occurred just before the October 1929 stock market crash. That graphic in the leading financial paper, along with an article that accompanied it, raised the thought that today, yes, this very day could be the beginning of the end for the stock market. It was one factor that contributed to a shift in mass psychology. As I’ve said in a previous column, markets move when other investors believe they know what other investors are thinking.

In short, my survey indicated that Oct. 19, 1987, was a climax of disturbing narratives. It became a day of fast reactions amid a mood of extreme crisis in which it seemed that no one knew what was going on and that you had to trust your own gut feelings.

The week of Oct. 19, 1987, people around the country kept a close eye on the market

Given the state of communications then, it is amazing how quickly the panic spread. As my respondents told me on their questionnaires, most people learned of the market plunge through direct word of mouth.

I first heard that the market was plummeting while lecturing to my morning class at Yale. A student in the back of the room was listening to a miniature transistor radio with an earphone, and interrupted me to tell us all about the market.

Right after class, I walked to my broker’s office at Merrill Lynch in downtown New Haven, to assess the mood there. My broker appeared harassed and busy, and had time enough only to say, “Don’t worry!”

He was right for long-term investors: The market began rising later that week, and in retrospect, stock charts show that buy-and-hold investors did splendidly if they stuck to their strategies. But that’s easy to say now.

Like the 2016 airport stampede, the 1987 stock market fall was a panic caused by fear and based on rumors, not on real danger. In 1987, a powerful feedback loop from human to human — not computer to computer — set the market spinning.

Such feedback loops have been well documented in birds, mice, cats and rhesus monkeys. And in 2007 the neuroscientists Andreas Olsson, Katherine I. Nearing and Elizabeth A. Phelps described the neural mechanisms at work when fear spreads from human to human.

The Chicago Stock Exchange was drawn into the market fall

We will have panics but not an exact repeat of Oct. 19, 1997. In one way, the situation has probably gotten worse: Technology has made viral rumor transmission much easier. But there are regulations in place that were intended to forestall another one-day market collapse of such severity.

In response to the 1987 crash and the Brady Commission report, the New York Stock Exchange instituted Rule 80B, a “circuit breaker” that, in its current amended form, shuts down trading for the day if the Standard & Poor’s 500-stock index falls 20 percent from the previous close. That 20 percent threshold is interesting: Regulators settled on a percentage decline just a trifle less than the one that occurred in 1987. That choice may have been an unintentional homage to the power of narratives in that episode.

But 20 percent would still be a big drop. Many people believe that stock prices are already very high — the Dow Jones industrial average crossed 23,000 this week — and if the right kinds of human interactions build in a crescendo, we could have another monumental one-day decline. One-day market drops are not the greatest danger, of course. The bear market that started during the financial crisis in 2007 was a far more consequential downturn, and it took months to wend its way toward a market bottom in March 2009.

That should not be understood as a prediction that the market will have another great fall, however. It is simply an acknowledgment that such events involve the human psyche on a mass scale. We should not be surprised if they occur or even if, for a protracted period, the market remains remarkably calm. We are at risk, but with luck, another perfect storm — like the one that struck on Oct. 19, 1987 — might not happen in the next 30 years.

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CPL's picture

DOW 36000!!!  BULLISH!

hedgeless_horseman's picture


Robert Shiller: A Stock Market Panic Like 1987 Could Happen Again

Sure, but...

Janet Yellen: "I Don't Believe We Will See Another Crisis In Our Lifetime"

So, as long as Janet is alive, the Fed has your back.


rmopf2010's picture

PPT on 24/7 line of duty, working material funny money

skbull44's picture

With ‘alt-control-p-at-the-ready central banks’ who have broken the ceiling on purchasing equities, can it ever happen again?

mtl4's picture

Clearly the 87 crash could happen again but Mr Shiller hasn't a clue why it actually happened back then if he's making those comparisons to the current stock market situation.

IH8OBAMA's picture

Done!  I'll give you $100 for that car, mister!  Anyone else have an antique car to sell?


SeuMadruga's picture

Right. No mention to algos (in one hand) nor CB's intervention (on the other) ?!

Oldwood's picture

In order to have a good panic, there must be an exit door, some place to run. Where are they going to run? CASH? The EU? China? Venezuela?

They have made all the doors the same or worse option that we are already in. There is no mystery here. Our "investors" are not stupid. They see the writing on the wall. There is no gain in another collapse and everyone knows it. To hedge on a collapse would seem fultile as you would own a large chunk of NOTHING as that is all money is when it all goes to shit. They cannot allow this to fail and will do ANYTHING to keep it afloat....and we must remember, this whole thing is THEIR construct, not OURS. We are simply inclined to go along with the illusion as that is what profits us (we believe). Rational runners knwo there is no place ot go. The irrational runners will run off the cliff, and not to anyone's lack of notice.


ultraticum's picture

All pictured:  a bunch of money-jobbing wankers whose lives are so fucking shallow they could be devastated by the rapid 1 day evaporation of a bubble.  On a world-scale of suffering, my heart really really really goes out to them. /s

stocktivity's picture

Now Now...Everyone calm down. It is no longer possible for the market to go down. Move along.

SeuMadruga's picture

Move a long (not a short) !   ;-)

Obchelli's picture

And one has Nobel prize in economics and other looks like ugly grandma - guess who is more powerful?


BTW market recovered from the "Biggest 0.48% Crash" in last 2 month looking at another ATH 

Shitonya Serfs's picture

The robot traders don't panic. There are few people traders left to run for the floor to trade. FU Shiller - Nobel Prize in Economics...teeheehee

Buck Johnson's picture

It's really going to hurt.


CPL's picture

I'd like to call this fiat shitstorm coming up: The Curse of Midas Part 2 - The Hebe Zio Shekeling.

yogibear's picture

Armstrong says 42,000 or more.

Shill-head is stuck looking like a fool. The sky will fall

Shiller is a kook.

Endless cheap central bankster money will fuel this rigged market much higher.


ParkAveFlasher's picture

20% in a day?  Quit crying, ya Mary's. #longminers

LawsofPhysics's picture

LOL!!!!  NOT without a mechanism for true price discoovery!!!!

Fucking shill

"Full Faith and Credit"

Burltron's picture

Sorry, machines don't panic.

Ol Man's picture

TPB have insured that such an event CANNOT occur again.  The next crash will not look like anything that has been seen before...


All the better...


SeuMadruga's picture

The next crash is already ongoing since 2009 disguised in its mirrored crack-up boom form.

Liberaldisdain's picture

This has got to be the biggest bullshit clickbait site on the web. geezuz. 

hedgeless_horseman's picture


Then why would you possibly be wasting your time commenting here?

Adios, and don't let the homepage hit you in the ass on the way out.

Liberaldisdain's picture

Hola Senorita! 

I like to support perma bears through clickbait revenue to keep them off the food stamp line. The line is getting really long with all the ZH sellers selling for the last 7 years.......



RagaMuffin's picture

Those that can not do, teach........


jamesmmu's picture

DOW almost green now. if DOW can end up losing 100+ pts, ppl will turn bearish today. This is how fragile the market is. 



xantippa's picture



i mean some of the comments on here.  are there any real traders left.

ebworthen's picture

" would be comforting to believe that this couldn't happen again."

No, it would be comforting to see S&P 666 again.

rejected's picture
Robert Shiller: A Stock Market Panic Like 1987 Could Happen Again

Could happen?  All kinds of shit could happen!

Like reading a first grade paper on Santa Claus.


wintraiz's picture

i was talking to a market analyst via email and they brogh up the time in march of 2001 i think it was.  I think the next crash will be  gradual crumbling.  for now I also keep a close eye on shepwave for my actual trading.  so far so good. 

Philo Beddoe's picture

Shepwave fucks my wife while I am at work. The wife is happier lately I have to admit. 

xantippa's picture

she is happy because she is taking their trades.  


good calls today by them.  sometimes it is obvious that they have some play in the markets being rigged. how in the HELL can they know exactly when markets will do this crap is beyond me 

Philo Beddoe's picture

That first part was actually a pretty good comeback. 

Good luck pimping your crap. 

Ben A Drill's picture

One flip of the switch closing trading down for three days will be the answer why the stock market won’t crash. The FEDs will backstop any drop in the market over 10%.

wintraiz's picture


i wish it wouild crash to the floor but these articles are nothing but click bait.  still fun to read i guess.


nice calls by shepwave today.  nice way to catch the intra daylow of S&P and Dow.  let's see if the QQQ can do what they expect.  

aliens is here's picture


xantippa's picture

think i sawe an alien with trump in one of those photos. 

RubyPetunia's picture

Sure. And it will. It's a given.

Regardless, I don't think this present expansion is either irrational or a bubble. A whole lot of things were being stifled during the last eight -- even 16, even 24, even 28 -- years that are now being let out of the bottle.

Regulations are being rescinded, mines are being opened, pipelines are being built, fears are being relieved and stable expectations are returning.

If Trump's health and tax plans get passed I wouldn't be surprised to see Dow legitimately hit 25,000.

If SOX and Dodd-Frank and, dare I say, Davis-Bacon get repealed whoa.

And let's not forget non-federal trends. Suppose states like Pennsylvania and Ohio go right-to-work which are real possibilities.

Good things are happening.


LawsofPhysics's picture

LOL!!!  So DEBT, deficits, and unfunded liabilities (promises) don't matter?

Good luck with that!

The "market" is not going down, but it has nothing to do with such fundamentals.

RubyPetunia's picture

Debt's only an issue if looks like the debt won't be repaid, at which point loans won't be made, people won't invest and everything, not just the stock market, crashes.

At this point, investors think they will be repaid and they probably will.

LawsofPhysics's picture

Paid back with what? The Fed has directly or indirectly (on primary dealer balance sheets) added enough new money to increase prices by over 1,500%!!!!

Go ahead Mr. Yellen, pay back all those "investors". One has to wonder if the fed will see inflation then?


RubyPetunia's picture

OK, if you feel that way you should invest in gold. I take that back. You have to be able to protect the gold for it be of use for you.

Invest in ammunition. Ammunition and canned goods. And a small piece of property near a good water source that you can camoflauge well.

You'll be set for a happy and interesting life.

Don't get sick though.

bshirley1968's picture

No WAY!  Are you fucking kidding me?!  How could this ever happen? /sar

What a frickin' joke! It is not a matter of "could" or "if" but when.  I really don't give a shit anymore.  Just wish they would hurry up and get it on.

booboo's picture

Several years after The Great One Day War of 2018 a NEST team managed to gain entry to The Fed Trade room where they discovered a funtioning computer running off a powerful rack if Lithium Ion batteries, the computer was attempting to buy up shares of long defunct Facebook.

venturen's picture

He is wrong....never before have you had the treasuries and central banks all set on rewarding the crooks of wall street...this time will be different and a lot more ugly!

buzzsaw99's picture

so btfd then?  far from being something to fear 1987 was a buying opportunity.  doom harder.

Son of Captain Nemo's picture

By all means necessary...