Widespread crash fears created a self-fulfilling prophecy in October 1987

Evidence

To the extent that fears of a crash had been widespread in the months preceding October 1987 and Shiller’s survey suggests they were they would help to explain the growing popularity of portfolio insurance, and also would add an element of self-fulfilling prophecy to the October events: large numbers of investors who feared a crash responded to price declines by all running for the exit and finding “it was large enough to accommodate only a few” (Brady Commission 1988, p. 57). — Donald MacKenzie, An Engine, Not a Camera, 859

Categorization

• DEEPTHINKING: A self-fulfilling prophecy here fuses psychology, rational hedging behavior, and mechanical market limits into one causal story — exactly the density that makes performativity’s failure mode concrete.
• XREF: connects to: The 1987 crash permanently shifted the S&P options market’s implied distribution toward crash expectations. — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 143; Portfolio insurers sold $6 billion of stocks and index futures on October 19. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 850; Rare but catastrophic events generate fear wildly disproportionate to actual risk (+3 more)

Broader Connections

• Rare but catastrophic events generate fear wildly disproportionate to actual risk #expands (0.75)
• State intervention after the 1987 crash averted a 1929-style depression #responds-to (0.75) — Alex Callinicos, Against Postmodernism, 515