Remember the 1987 crash?

It began on a day known as Black Monday:

The crash began in Hong Kong, spread west through international time zones to Europe, hitting the United States after other markets had already declined by a significant margin. The Dow Jones Industrial Average (DJIA) dropped by 508 points to 1739 (22.6%).[1] By the end of October, stock markets in Hong Kong had fallen 45.8%, Australia 41.8%, Spain 31%, the United Kingdom 26.4%, the United States 22.68%, and Canada 22.5%.

Despite fears of a repeat of the 1930s Depression, the market rallied immediately after the crash, posting a record one-day gain of 102.27 the very next day and 186.64 points on Thursday October 22. It took only two years for the Dow to recover completely; by September 1989, the market had regained all of the value it had lost in the 1987 crash. The Dow Jones Industrial Average gained six-tenths of a percent during the calendar year 1987.

Not so 1929:

October 24 (known as Black Thursday) was the first in a number of increasingly shocking market drops. This was followed swiftly by Black Monday on October 28 and Black Tuesday on October 29.

On Black Tuesday, the Dow Jones Industrial Average fell 38 points to 260, a drop of 12.8%. The deluge of selling overwhelmed the ticker tape system that normally gave investors the current prices of their shares. Telephone lines and telegraphs were clogged and were unable to cope. This information vacuum only led to more fear and panic. The technology of the New Era, much celebrated by investors previously, now served to deepen their suffering.

Black Tuesday was a day of chaos. Forced to liquidate their stocks because of margin calls, overextended investors flooded the exchange with sell orders. The glamour stocks of the age saw their values plummet. Across the two days, the Dow Jones Industrial Average fell 23%.

By the end of the week of November 11, the index stood at 228, a cumulative drop of 40 percent from the September high. The markets rallied in succeeding months but it would be a false recovery that led unsuspecting investors into the worst economic crisis of modern times. The Dow Jones Industrial Average would lose 89% of its value before finally bottoming out in July 1932.

The reason I'm asking is because September 29 was widely described as the "blackest day since 1987":

The Dow Jones industrial average tumbled nearly 778 points, or almost 7 percent, its biggest single-day points fall ever, easily beating the 684 points it lost on the first day of trading after the Sept. 11, 2001, terrorist attacks. By the end of the day, the broader stock indicators also plummeted. The Standard & Poor's 500 index declined 106.62, or nearly 9 percent, its largest-ever point drop and its biggest percentage loss since the week after the October 1987 crash.

Because the market did not drop nearly as much (and it has bounced back, if erratically), what has happened has not been a repeat of 1987 or 1929. However, we are barely into the magical month of October.

And while I'm not into analysis by superstition, it's tough to ignore the fact that people get weird this time of year. And this is hardly a normal year.

Anyway, back in 2003, an analyst named "Lope" looked closely at the 1987 crash in the context of psychology, and began his argument by citing a paper by Edinburgh economist Donald Mackenzie. (The latter argued that "financial markets of high modernity are designed entities, and "the question of their design is always a political question, even if it is seldom recognized as such.")

In his fascinating argument, "Lope" maintains that the main cause of the 1987 crash was along the lines of copycat psychology -- a self-fulfilling prophecy:

1) why the 1987 crash occurred on Monday, October 19.
in the historical model investors had adopted, the crash had occurred on a Monday in October, 1929. The overlap in Mondays resulted in a self-fulfilling prophecy to emerge in 1987.

2) why the move was so extreme in price.
1987 fell 23% because participants noted that 1929 had fallen 24%. Their willingness to sell using 1929 as an example resulted in replication.

3) why it fell so quickly.
1929's 24% decline had only taken 2 days to occur. By analogy, market participants felt equities could fall as fast in 1987

4) why 1987 was an international phenomenon.
the 1929 crash set a precedent by affecting markets from Paris to London to New York. Thus investors the world over were influenced by the memory of the crash and Great Depression, not just those in the U.S., and were willing to sell in 1987 using the 1929 memory as justification

5) how a lack of major news or important events prior to the decline could justify a 22% change.
the cause was psychological, caused by an old memory. Thus it needed no events or important news to emerge.

A hell of a way to run a market.

Or an election.

I hope people are not as stupid or suggestible as some might think.

Or hope.

MORE: Speaking of psychology, Dr. Helen (who is a professional psychologist) asks "How much of the financial crisis is psychological?":

...I sometimes wonder how much of the financial picture is accurate and how much is manufactured in order to get a Democrat elected. One has to ponder about the timing of all of this bad news.

Why the crescendo of economic collapse right before the election? Why didn't the media and congress act just as concerned some time ago or wait until sometime after the election to go into crisis mode? The timing of the current financial crisis seems too planned and calculating to be just a coincidence.

...In the coming months and years after the election, we will be told how Obama has managed this crisis and overcome it, despite the fact that he and other Democrats had their hands in the Fannie Mae and Freddie Mac fiasco and caused some of it, but that's another story. But by then, it will be too late. Those who voted for Obama based on economic fear may realize too late that they may have buyer's remorse.

Unfortunately, the inability of Republicans to agree on economic issues (or at least the perception of it) may steer the public's economic fears in precisely the wrong direction.