On October 19, 1987, the stock market crashed. It was the worst single-day decline, almost doubling the previous worst day in 1929.
Unlike in 1929, something unique happened this time. Questionnaires were sent to individual and institutional investors to get inside their heads that day.
Robert Shiller was behind it and compiled almost 1,000 responses into a report released a month later. Two things stood out.
Most investors did nothing that day.
In the less connected world of 1987, most individual investors heard about the crash by 2:00 pm Eastern Time.
However, institutional investors knew something was up within an hour of the market open. Then they started talking to brokers and friends as anxiety kicked in. Yet, despite the fear, a remarkably small number of the investors surveyed actually bought or sold that day.
The average individual investor…reported talking to 7.4 other people on the day of the crash, the average institutional investor 19.7 other people. The average individual checked the price of stocks 3.2 times on that day. The average institutional investor checked the price of stocks 35.0 times that day.
Many of these people were emotionally involved in the market. The questionnaire asked about actual symptoms of anxiety experienced by respondents: difficulty concentrating, sweaty palms, tightness in chest, irritability, or rapid pulse. Fully 20.3% of the individual investors and 43.1% of the institutional investors answered yes for the date, Monday October 19; substantial percentages answered yes for adjacent days. It is remarkable that such a proportion of the general population reported such specific symptoms of real anxiety at one time.
Moreover, 23.0% of the individual investors and 40.2% of the institutional investors reported a contagion of fear from other investors. Among individual investors who sold on October 19, 53.9% reported experiencing contagion of fear. Moreover, 35.0% of the individual investors and 53.2% of the institutional investors report talking of events of 1929 on the few days before October 19. The percents who spoke of 1929 were even higher for those who sold on October 19.
Despite all this anxiety, most people did not change their holdings of stocks….only 5.2% of individual investors surveyed reported actually being net buyers or sellers of either individual corporate stocks, index futures, or stock options on October 19… There were almost four times as many who experienced the symptoms of anxiety. With institutional investors, 31.1% changed their holdings on October 19; slightly less than the percentage reporting experiencing symptoms of anxiety. Thus, there was a lot of talk and anxiety, little action.
Much of the anxiety began the week before. The Wednesday, Thursday, and Friday before, all saw declines. The weekend allowed investors to stew on it.
One respondent who answered wrote: “Saturday was a day of soul searching to resist the absolute fear that Monday could have dealt. Do we sell out Monday or ride it out?”
Price action was the biggest reason for buying/selling that day.
Of the few who did act, they gave a number of reasons why. The reasons for selling:
- “Investors were asked whether they were influenced by price dropping through a 200-day moving average or other long-term trend line… About a third in both the individual and institutional samples answered yes.”
- 10% of investors had a policy in place to limit losses, “among those who sold October 19, close to 40% individual, close to 20% institutional.”
- Some had recently changed their strategy. Of those who made a change to limit losses, “46.4% of these individual investors and 50% of the institutional investors adopted the policy within a month of the crash.”
- Some just abandoned their long-term strategy: “Respondents were also asked whether they had abandoned a policy of investing for the long term just before the crash: 13.2% of the individual investors and 6.6% of the institutional investors said yes. Among those who sold October 19, the percentages were 38.5% individual and 27.8% institutional… Another institutional investor who claimed the policy was abandoned October 19 wrote ‘The market was in a free fall and therefore unable to make proper investment decisions.'”
So the primary reasons people sold were self-imposed automated selling and abandoning a strategy entirely.
And the reasons for buying?
Many individual investors said “intuition” or “gut feeling” or just “knew there would be a rebound.” Often individual investors mentioned theories of what the “big” investors were doing. There was often a suggestion that the market tends to rebound when certain conditions were met, but only infrequent references to technical analysis. Institutional investors usually did not explain why they expected a rebound. When they did, the answers were usually similar to those of individual investors, simple intuitive statements: “gut feeling,” “historical evidence and common sense,” “market psychology.”
A common theme…among institutional investors was that the magnitude of the decline was prima facie evidence of a rebound: “too far too fast for it not to rebound,” “logic (wishful thinking perhaps) that such a decline has never occurred without a corresponding up reaction.”… The theme was the magnitude of the decline, not the bargains that were created by the decline.
Reacting to price movement sums it up. Investors still parrot the same BS lines (buying the dip). Surprisingly, no one was pushing the long-term opportunity of buying stocks at bargain prices.
Shiller summed up the study with the theory of a feedback loop. Investors reacted to prices, their own thinking, and their reaction to other investors. Which fed on itself.
There were two channels by which price declines could feed back into further price declines. First a price-to-price channel: investors on October 19 were reacting to price changes. Second, a social psychological channel: investors were directly reacting to each other…both feedback channels were operating fast enough among the broad masses of investors to play an important role in the hour-to-hour movements of the market: the communications proceeded rapidly, and prices were checked with great frequency. This was especially so among those investors who were net buyers or sellers on October 19.