Shiller: Another Bear Market Could Happen

The kind of panic that ensure thirty years ago, on October 19th, 1987, could happen again. This according to Yale professor Robert Shiller in his recent New York Times article.

While Shiller points out that regulatory and technological progress has ruled out an exact repeat of that day, the results of a survey he conducted within four days of the event revealed that “fundamentally, that market crash was a mass stampede set off through viral contagion.”  Shiller explains that after sending out 3,250 questionnaires to both individual and institutional investors, he found evidence that differed sharply from the findings reported by the task force set up by Ronald Reagan (the Brady Commission)—which attributed the decline to factors such as the “high merchandise trade deficit” and tax policy.

The article outlines the focus of Shiller’s survey and described his findings as a “climax of disturbing narratives,” particularly since the Internet was not nearly as widely used at the time and most of the panic spread through word-of-mouth. He says, “It became a day of fast reactions amid a mood of extreme crisis in which it seemed that no one knew what was going on and that you had to trust your own gut feelings.”

Shiller concludes that the 1987 market drop was a “panic caused by fear and based on rumors, not on real danger.” While an exact repeat might not happen, he asserts that a similar chain of events could lead to a similar panic. “That should not be understood as a prediction that the market will have another great fall, however. It is simply an acknowledgement that such events involve the human psyche on a mass scale.”