ipl-logo

Crash Of 1987 Essay

624 Words3 Pages

The Crash of 1987 is one that poses several questions. Academics and analysts alike have various theories behind the reasons of the crash. While many believe that the causes were mainly fundamental, some argue for the behavioral aspects of the Crash. Overreaction, herd behavior, risk aversion and representativeness heuristic are some of the behavioral theories that analysts have come up with along with empirical evidence. Due to the limited scope of the paper, we will attempt to highlight and analyze the behavioral aspects of the Crash strictly from a theoretical point of view. Representativeness heuristic is a behavioral tendency of people to generalize events and categorize them according to a common or well-known class. The problem with this is that such heuristics fail to take important underlying probabilities into account …show more content…

Another possible explanation behind the Crash of 1987 was the problem of representativeness heuristic. Frankel (2008), in his paper, cites Shiller's (1998) explanation that reliance on historical data is an example of representativeness heuristic. In Frankel's (2008) paper, two types of investors are considered: naive and rational investors. Rational investors closely look for signals in the market and act accordingly (lower or increase the price they bid for the stocks). On the other hand, naive investors make rash judgments based on patterns (a problem of overconfidence) and since most investors tend to be risk averse, they sell their stocks assuming prices will further fall eventually leading to a crash in the market. The paper notes that many investors independently observed close patterns like this in both the 1929 and 1987 crashes . In fact, we learn, that on the morning of Black Monday, the Wall Street Jorunal

Show More
Related

Great Depression Dbq

634 Words | 3 Pages

The problem was that many people that bought stock bought their shares on a type of credit in which they paid part of the amount required and planned on paying the rest after they sold their share. When the stock market crashed, shares were worth nothing and the investors could not afford to pay the remaining balance of the original purchase price. Moreover it was common for people to borrow money from banks to buy stock so it became a problem for the banks when the population could not pay back their

Read More

Summary Of Only Yesterday By Fredrick Lewis Allen

1071 Words | 5 Pages

In September of 1929 Allen explains that the stock market crashes for the first time then rebounded, but by the end of October, the market was officially broken. The stock market crash made the Americans who invested into the Bull Market in left them empty-handed. The decline of the stock market caused the entire United States economy to slip into the Great Depression which lasted for approximately 10 years because many Americans lost money they initially invested. However, the during the time of the instability of the stock market Allen explains that Americans thought the market would rebut itself. In fact, the Harvard Economic Society hypothesized that the stock market would not suffer in a “business depression,” however, the Society did not realize that Great Depression was in the future.

Read More

Great Depression Dbq

222 Words | 1 Pages

Although the 1920’s were booming and prosperous, the United States soon entered a prolonged economic depression. In October of 1929, prices in the stock market began an uneven downward slide (Document 2). As investors decided that the previous boom in the stock market was over, they sold more stock, thus causing the declination to increase even further. Many citizens of the United States were greatly affected by this. Families who had invested in stock lost most, if not all, or their life savings.

Read More

How Did Americans Grow During The Roaring Twenties Dbq

1053 Words | 5 Pages

Leuchtenberg sad, “There was no single cause of the crash and ensuing depression,” [Doc2]. Many things as stated earlier contributed to the crash, such as overexpansion of credit, goods, industries and rising rates of unemployment. Many Americans saw the Stock Market as an easy way to create wealth by buying stocks cheap, usually at a margin, and selling for a higher price, hopeful to profit. Buying on margin was the act of paying some money on a stock, but loaning the rest from a bank who expected would be paid back when profit was made. Stocks became more expensive to the point where nobody wanted to buy them because of their extreme price.

Read More

Why Was The American Economy Dbq

710 Words | 3 Pages

The American economy suffered this vast plunge because speculation in the stock market, maldistribution of income, and overproduction of goods. For the duration of this time period, the purchasing of stocks became very popular,

Read More

Compare And Contrast Fdr And Hoover

841 Words | 4 Pages

On October 29, 1929, the stock market crashed, which led to a large economic depression and dramatically dropped in stock prices. This depression caused people to get scared and not buy any

Read More

Great Depression Dbq

884 Words | 4 Pages

When these stocks crashed banks were left without money and many had to close down. People lined outside of banks for hours to try and get their savings money out. This was impossible since banks did not have enough money. Millions of people lost their savings and were unable to get the money they needed to support their families. This also led to a big rise in unemployment.

Read More

How Did Hoover Lead Up To The Great Depression

832 Words | 4 Pages

October 29, 1929 was perhaps one of the most dreadful days in American history for its economy. Before “Black Tuesday”, as it was known, stock prices had been dropping. As a result, America experienced a devastating reality known as the Stock Market Crash. Many economists hold the belief that it was caused due to people “buying on margin”. The effects of this were detrimental and quickly lead us into a depression, and not only for America, but around the world as well.

Read More

What Caused The Great Depression Dbq Analysis

1159 Words | 5 Pages

People trusted the “Buy now, Pay later” idea, so much so that they bought so much, and didn't have enough money to pay later. The distribution in income was only favorable for 40% of the entire population, and the citizens were gambling on their stock investments and thought nothing could go wrong. Imagine it is October 28, 1929, living a lavish lifestyle in your mansion, only to have the all of the dreams that came true crushed the very next

Read More

New Deal Dbq

1374 Words | 6 Pages

In October of 1929, there was a stock market crash bigger than the American people had ever experienced before. The crash was caused by speculation and buying stocks on margin. Once the stockholders realised that the prices were inflated, they tried to get out and sell. This caused the stock market to lose six-sevenths of its original value (Fischer 3/16). Since the stockholders were buying on margin, they lost everything they had when the prices fell.

Read More

The Stock Market Crash Of The 1920's

226 Words | 1 Pages

The stock market crash of October 29, 1929 provided a dramatic end to an era of unprecedented, and unprecedentedly lopsided, prosperity. This disaster had been brewing for years. Different historians and economists offer different explanations for the crisis–some blame the increasingly uneven distribution of wealth and purchasing power in the 1920s, while others blame the decade’s agricultural slump or the international instability caused by World War I. In any case, the nation was woefully unprepared for the crash. For the most part, banks were unregulated and uninsured.

Read More

Economic Inequality In The Gilded Age

1411 Words | 6 Pages

Filled with prosperity and growth, everyone thought the twenties were the start of a great run for the United States. Dr. Dice, a business professor at Ohio State University, predicted that the stock market would continue to gain in the near future, more than ever before (Document 6). But, he went on to say that it would eventually collapse. Not only did he know that it cannot continue to grow forever, but he realized that small investors have begun to take part in the game of stock. He saw that such investors would add to the vulnerability of the market.

Read More

What Caused The Great Depression Research Paper

780 Words | 4 Pages

There began to be a gradual decline in prices and the stock market ruptured. On October 24, 1929, the infamous “Black Thursday” took place, where stock holders went on a panic selling spree. Things then went from bad to worse, stock prices went down 33 percent. People stopped purchasing goods and business investments decreased after the crash. In the fall of 1930, the first of four major waves

Read More

The Pros And Cons Of Herding

1724 Words | 7 Pages

In How Markets Fail by John Cassidy, the story of Black Monday is given as an example of irrational herd mentality. In 1987, the New York Stock exchange almost crashed because people believed it was crashing (Caddidy, 2009, Pg. 166). According to Cassidy, “The crash apparently had nothing to do with any new story other than the crash itself.” (Cassidy, 2009, pg. 168). This event is a self-fulfilling prophesy as investors think the market is going bad, causing the market to go bad.

Read More

Possible Solutions To The Great Depression

728 Words | 3 Pages

(Document 1). The stock market crash had another dreadful effect. Banks closed and people were astonished and surprised, so they crowded the banks to try to

Read More

More about Crash Of 1987 Essay

Related Topics

Open Document