The 1987 crash stemmed from ignorance of mechanical selling, not portfolio insurance itself.

Evidence

For Leland, then, the key factor in the 1987 crash was not portfolio insurance per se but lack of awareness of the true extent of portfolio insurance’s “mechanical” sales. “If everybody knows that we’re uninformed traders, then people don’t revise their expectations downward when the price falls. They just say things are on sale. Then they will take the other side [i.e. buy] more willingly. If everyone thinks the price is falling because somebody has information, then they won’t take the other side.” (Leland interview) The price fall will then be much larger. — Donald MacKenzie, An Engine, Not a Camera, 871

Categorization

• XREF: Connects to the book’s broader performativity thesis: whether agents ‘know’ the model affects whether it produces or prevents crashes; also resonates with ‘things are on sale’ as a liquidity-vs-information distinction in market microstructure literature. — connects to: Portfolio insurance largely protected client floors even during the 1987 crash — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 841; Portfolio insurance’s inventors concede it helped cause the 1987 crash — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 865; Market infrastructure itself failed under the 1987 crash’s order flow — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 820 (+1 more)
• SEED: Essay angle: ‘the crash that wasn’t caused by what caused it’ — how misreading mechanical flows as information drives every 1987-style panic, in markets and elsewhere.

Broader Connections

• Portfolio insurance’s inventors concede it helped cause the 1987 crash #contradicts (0.85) — Donald MacKenzie, An Engine, Not a Camera, 865
• Market infrastructure itself failed under the 1987 crash’s order flow #responds-to (0.70) — Donald MacKenzie, An Engine, Not a Camera, 820