Portfolio insurance’s inventors concede it helped cause the 1987 crash

Evidence

Given the ambiguity of the evidence and the depth of the underlying issues, it is interesting that the developers of portfolio insurance do not take the easy option of denying that it had a significant role in the 1987 crash. Leland and Rubinstein are both broadly “orthodox” economists and efficient-market theorists (see, for example, Rubinstein 2001). How do they reconcile this with their acceptance that it “isn’t ridiculous to say that portfolio insurance was a significant factor in the market crash” (Rubinstein interview)? — Donald MacKenzie, An Engine, Not a Camera, 865

Categorization

• SEED: The puzzle of orthodox efficient-market theorists conceding their own invention’s market-crash role — a case study in model-builders’ accountability for the performativity of their models.
• XREF: connects to: Portfolio insurance forced clients to miss the entire market rebound after the crash — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 843; Portfolio insurance largely protected client floors even during the 1987 crash — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 841; Portfolio insurance designed to limit losses can amplify market volatility. — Shapiro, Susan P., The Social Control of Impersonal Trust, 144 (+3 more)

Broader Connections

• Portfolio insurance designed to limit losses can amplify market volatility. #expands (0.85) — Shapiro, Susan P., The Social Control of Impersonal Trust, 144