Portfolio insurance was the computerized selling strategy widely blamed for amplifying the 1987 stock-market crash.
Portfolio insurance used mathematical rules and futures markets to reduce exposure as prices declined. In principle, the strategy was intended to limit losses by selling stock-index futures or other assets when markets fell. When many investors followed similar rules, however, their trades could reinforce the downward movement.
On October 19, 1987, liquidity deteriorated as selling accelerated across markets. Economists and market historians continue to debate how much portfolio insurance caused the crash, because other factors included high valuations, international trade tensions, interest-rate concerns, and market-structure weaknesses.
Portfolio insurance was not the same as ordinary insurance and did not guarantee that investors would avoid losses. The episode helped prompt reforms, including coordinated market-wide circuit breakers and improvements in trading procedures. It also became an early example of how automated strategies can interact with human panic.