THE BLOG
10/20/2011 02:28 pm ET | Updated Dec 20, 2011

Remembering Black Monday: Money Magic on Wall Street

Everyone would like to believe in a money benefactor -- someone or something -- to bestow financial security and freedom. This has been especially true for the generations of Americans who have never lived through tough economic times like the Great Depression. For those generations of Americans, the stock market was a great benefactor -- a source of money magic -- until the stock market crash of October 1987.

On October 19, 1987 (24 years ago), known as Black Monday on Wall Street, the Dow Jones industrial average plummeted 508 points, an amazing drop of 22.6 percent. Approximately $500 billion in paper value was lost. Even though only 20 percent of Americans invested in the stock market at that time, the crash had a rippling effect that impacted on everything from consumer spending to pension plans.

Americans seemed remarkably calm and showed surprising unconcern. According to a Newsweek poll taken right after the crash, 61 percent of those surveyed said the crash did not necessarily indicate a serious downward economic trend, and 63 percent said the decline in stock prices might help the economy in the long run forcing the government to face up to economic problems.

Likewise, a Los Angeles Times poll found that 64 percent of Americans thought the odds were better than fifty-fifty against a recession. The Times poll also found that stockholders who lost money in the crash were not discouraged about the stock market. According to the poll: 69 percent of the stock market losers said they do not plan to change the level of their stock investing, and only 12 percent plan to cut back.

Why such confidence in the face of loss? Psychologically, when we make a commitment to something -- e.g., the stock market -- we tend to rationalize any conflicting information and avoid behavior that would alter the commitment. We are all creatures of habit. In addition, some of the investors -- those that did not sell their stocks immediately and impulsively -- may have felt a momentary psychological loss but maintained their position, never incurred a financial loss and actually saw a great financial gain. As a result, the stock market, which had such allure for many Americans, continued to hold its magical luster even in the face of such a significant economic crisis.

The Great Recession certainly has had a longer-lasting effect for not only stock holders but for most Americans who sit on the sidelines. The incredible rebound experienced after "Black Monday" only strengthened the allure of Wall Street but the long-lasting aftermath of the Great Recession has left American investors searching for the crystal ball to reveal whether the stock market is still the answer to money growth and ultimately their financial security. They no longer trust or believe in "money magic" on Wall Street.