The Challenger disaster was the January 28, 1986, destruction of the space shuttle Challenger shortly after liftoff from Cape Canaveral. In the book, the event is also a case study in collective intelligence: within half an hour, investors’ sharply different responses to the shuttle’s contractors pointed to Morton Thiokol, whose faulty booster seals were later identified as the cause. The market appeared to reach a correct conclusion before the public had a clear explanation, yet investigators could not establish how the investors had arrived at it.

Launch and immediate market reaction

At 11:38 a.m. on January 28, Challenger lifted off. Seventy-four seconds later, ten miles above the ground, it exploded. The launch had been televised, and news spread quickly: the first report reached the Dow Jones News Wire eight minutes after the explosion. Investors soon began selling shares in the four major contractors involved in the launch, but their reactions were not uniform.

Rockwell International had built the shuttle and its main engines; Lockheed managed ground support; Martin Marietta manufactured the external fuel tank; and Morton Thiokol built the solid-fuel booster rocket. Twenty-one minutes after the explosion, Lockheed was down 5 percent, Martin Marietta 3 percent, and Rockwell 6 percent. Thiokol’s shares faced much heavier selling pressure. Trading was halted almost immediately because so many investors wanted to sell and so few wanted to buy. When trading resumed nearly an hour after the explosion, the stock was down 6 percent; by the market close, its decline had nearly doubled to almost 12 percent. The other three contractors’ stocks recovered somewhat, ending the day down by around 3 percent.

An early verdict without a public explanation

The divergent share prices amounted to a rapid market judgment: investors appeared to regard Thiokol as the contractor responsible and expected serious consequences for its business. That judgment preceded any public account that singled out the company. The next morning, The New York Times reported two circulating rumors, neither of which implicated Thiokol, and said there were no clues to the accident’s cause.

Six months later, the Presidential Commission on the Challenger revealed the mechanism behind the disaster. The O-ring seals in Thiokol’s booster rockets were meant to prevent hot exhaust gases from escaping, but cold weather made them less resilient. Gaps formed, allowing hot gases to leak out and burn into the main fuel tank, causing the explosion. At a congressional hearing, physicist Richard Feynman demonstrated the effect of cold on an O-ring by placing one in ice water; after he removed it, the temperature change had made the seal brittle. Thiokol was held liable, while the other contractors were exonerated.

What the market seemed to know

The contrast between the immediate price movements and the later investigation made the market’s first-day response seem eerie. The account describes that day’s trading as a relatively pure weighing process: buyers and sellers were trying to assess what had happened, without the media speculation, momentum trading, and Wall Street hype that can make markets erratic. Still, the episode was a single case. The decline in Thiokol’s shares might have been luck, might have reflected the company’s particular exposure to a downturn in the space program, or might have been amplified by the trading halt itself.

Finance professors Michael T. Maloney and J. Harold Mulherin investigated whether informed insiders explained the price movement. Their examination found no evidence that Thiokol executives had sold shares on January 28, or that executives at competing contractors had learned about the O-rings and shorted Thiokol while buying the other contractors’ stocks. The initial fall therefore could not be attributed to the obvious trade by someone acting on direct inside knowledge. Instead, it was driven by investors, most of them relatively uninformed, who were unwilling to buy Thiokol shares.

An unresolved collective judgment

Maloney and Mulherin could not give a convincing account of why those investors singled out Thiokol. In the end, they assumed insider information was responsible, but could not explain how it had reached the market. The book presents that gap as central to the case: the market’s conclusion matched the later finding of responsibility, but the process that produced the conclusion remained obscure.

A later disaster offered a caution against treating the 1986 result as a dependable rule. When Challenger’s sister shuttle Columbia disintegrated during reentry in 2003, the stock of Alliant Techsystems, then the owner of Thiokol and still a maker of booster rockets, plummeted. It later became clear that foam insulation striking Columbia’s wing during launch had caused that disaster. Traders had, in effect, carried the earlier association between a shuttle disaster and Thiokol’s boosters into a different accident. The Challenger episode thus stands both as an arresting example of collective judgment and as a warning: investors can imitate one another and mistake a precedent for evidence.