Business Adventures comprises twelve riveting case studies of key developments in business, economics and finance. While they concern events and companies you may never have heard of, the case studies are highly entertaining and the lessons learned from them are still applicable today.
How much can a person miss in three days? Well, if you happened to be a stock market investor who fell into a three-day coma on May 28, 1962, you might have woken up to almost no noticeable change in your investments, but you also would’ve slept straight through the chaos of the 1962 Flash Crash.
This three-day turmoil neatly illustrates how bizarre the behavior of Wall Street bankers can be, and how investors are guided more by their mood than actual facts.
On May 28, 1962, the mood on Wall Street was distinctly glum after six months of stock market decline. There was a lot of trading going on that morning, and the central office was running late in updating stock prices, as this was done manually.
Investors panicked when they realized they could only know a stock’s true price with a time lag of some 45 minutes, by which time they assumed the true price had fallen. Consequently, they rushed to sell off their shares, which created a downward spiral in prices. Their expectations became self-fulfilling, causing a crash that annihilated $20 billion in stock value.
But just as emotions triggered the crash, they also helped move along the recovery: investors considered it common knowledge that the Dow Jones Index, which measured the value of the general stock market, could not go below 500 points. So when the value came close to that limit, a buying panic broke out as everyone expected prices to go up. Three days after the crash, the market had fully recovered.
After this bizarre event, everyone was searching for rational explanations. But all stock exchange officials could come up with was that the government needed to pay more attention to the prevailing “business climate,” i.e., the mood and irrational expectations, of the financial market.
This inherent irrationality translates into the market’s unpredictability. In fact, the only thing that can be predicted about the market is, to quote famous banker J.P. Morgan: “It will fluctuate.”