Stock market crashes – the rational and the emotions

Stock market crashes are the black holes of finance. No one fully understands them, yet their extreme nature suggests that they may tell us something important about how markets really work. While black holes are studied extensively, the same is less true of market crashes. There may be a reason for this. In a world of efficient markets and rational actors, there is little room for violent and apparently inexplicable events such as the crashes of 1929 or 1987. True crashes are also rare, making it difficult to draw firm conclusions from them. From our perspective, it is precisely t...