Krugman: Markets tank; good luck figuring out why

By Paul Krugman / The New York Times

On Oct. 19, 1987, Black Monday, stock prices plunged, with the Dow Jones industrial average falling 22.6% in a day. Many commentators rushed to explain what triggered the crash; a response to some political event, some piece of economic data or whatever.

But economist Robert J. Shiller managed to get a questionnaire out to many market participants as the crash was in progress and found that essentially nobody selling stocks explained their actions as a response to news. Instead, more or less the only important reason given for selling stocks was that … their prices were falling. In other words, the stock plunge looked like a panic that fed on itself.

Shiller later won a Nobel Prize for his work on market irrationality; a prize he shared with Eugene Fama, who is famous for his theory that financial markets are extremely rational and efficient. Don’t let anyone tell you that the Swedes lack a sense of humor.

I’m dating myself here, but I often think about Shiller’s work when markets go wild, as they have the past few days.

https://www.heraldnet.com/opinion/krugman-markets-tank-good-luck-figuring-out-why/