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Black Monday

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Black Monday, or October 19, 1987, was the day of the single largest broad decline in the history of US equity markets. The Dow Jones Industrial Average declined by over 22% on Black Monday. Following Black Monday major stock markets experienced similarly substantial declines globally. Black Monday had no apparent catalyst. The leading explanation for the surprisingly sharp decline on Black Monday is that investors were irrational, and panic selling (with the help of program trading) occurred. Behavioral finance asserts that there is a psychology to the market, and such panics are one manifestation of it. Black Monday is thus a critical piece of evidence against the efficient market hypothesis, which assumes investors always behave according to rational expectations. Investigation of Black Monday events showed that computer systems and phone lines were overwhelmed by the unprecedented order volume. The frustrations caused by these delays as Black Monday progressed may have caused, or at least compounded, the panic. Curbs on program trading and market circuit breakers were subsequently instituted in many markets to prevent a repeat of Black Monday.

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