Michael T. Maloney

Michael T. Maloney is a finance professor whose research with J. Harold Mulherin examines how the stock market responded to the Challenger disaster. Their study found that investors singled out Morton Thiokol within minutes, before public reporting identified a cause, and that the market’s judgment was later borne out by the investigation. Yet the researchers could not explain how traders arrived at that conclusion, leaving their case both evidence for collective intelligence and a reminder of how opaque its mechanisms can be.

The Challenger Market Study

On January 28, 1986, the space shuttle Challenger exploded shortly after launch. Investors rapidly sold shares in the four major contractors associated with the mission, but Morton Thiokol, which built the solid-fuel booster rocket, was hit hardest. Trading in its stock was halted almost immediately amid an imbalance between sellers and buyers. When trading resumed nearly an hour after the explosion, the stock was down 6 percent; by the market’s close, it had fallen nearly 12 percent. The other three contractors’ shares recovered somewhat, ending the day down around 3 percent.

Maloney and Mulherin studied this divergence as a judgment made under uncertainty. No public comment on the day of the accident singled out Thiokol, and the New York Times reported the next morning that there were no clues to the cause. Nevertheless, Thiokol’s steeper decline indicated that investors expected the company to bear responsibility and face serious financial consequences. In this respect, the market’s relative valuation appeared to identify the company later found liable.

Testing the Insider Explanation

The researchers examined whether informed insiders could account for the early price movement. Their review of insider-trading records found no evidence that Thiokol executives sold stock on the day of the disaster. Nor did they find that executives at competing companies, who might have learned of the O-ring problem, sold Thiokol short while buying shares in the other contractors. The most obvious explanation—that knowledgeable insiders had made a targeted trade—did not fit the available evidence.

Maloney and Mulherin were left with the puzzle of why so many investors did not want Thiokol stock. They ultimately assumed that insider information was responsible for the decline, while acknowledging that they could not explain how such information had reached or influenced the market. The book underscores this uncertainty by citing economist Maureen O’Hara’s observation: “While markets appear to work in practice, we are not sure how they work in theory.”

Collective Judgment and Its Limits

The case is presented as a possible example of a crowd producing a sound estimate without any one participant necessarily possessing the full answer. A stock price aggregates investors’ judgments, weighted by the dollars they are willing to commit. Even if no trader knew exactly what had happened to the O-rings, the market may have combined separate pieces of information held by many participants into a conclusion close to the truth. The resemblance is to John Craven’s effort to locate the lost submarine Scorpion by combining independent estimates: individually incomplete judgments can form a more informative composite.

The book does not treat one market response as conclusive proof. The fall in Thiokol’s price might have been luck; the company’s business might have seemed unusually exposed to a downturn in the space program; or the trading halt itself might have made investors cautious. Still, the market’s relative movements among the four contractors were striking because, in the book’s account, trading that day functioned as a weighing mechanism rather than as a response to public speculation about Thiokol’s responsibility.

The later investigation confirmed the central inference. Six months after the explosion, the Presidential Commission on the Challenger found that Thiokol’s O-ring seals became less resilient in cold weather, allowing hot gases to escape and contribute to the shuttle’s destruction. Thiokol was held liable, while the other contractors were exonerated. Maloney and Mulherin’s study therefore occupies an unresolved position in the book’s argument: it documents a rapid collective judgment that proved accurate, while leaving open whether that result arose from distributed information, unexplained insider knowledge, or some other mechanism.