Newton’s Financial Misadventures in the South Sea Bubble [pdf]

http://www.dtc.umn.edu/~odlyzko/doc/mania13.pdf

by _culy • 8 years ago

96 35 8 years ago

dtc.umn.edu

comboy• 8 years ago

For those short on time, here's a TL;DR image: https://i.imgur.com/AEzxuLy.jpg

Charizma3• 8 years ago

more than a thousand words. Tx, comboy.

Casseres• 8 years ago

That chart shows a little under 10x from beginning to peak. Many people compare cryptocurrencies to the South Sea company, however, many of the different cryptocurrencies have gone 15-30x within the last year.

A lot of the hype in the media seems to be gone (or is now "doom and gloom"), so it will be interesting to see whether or not today's values can be sustained without a high rate of people continously buying in.

pimmen2• 8 years ago

Because markets move quicker than they did in the 18th century. These bubbles have progressively grown and collapsed quicker and quicker with the introduction of railways, telegraphs, phones, improvements in printing presses, radio, television and finally the Internet. The pattern is still the same.

You can look at Railway Mania, the Oil boom of the mid 1800s, the Florida property boom, the airline boom of the early 20th century and the Dot Com boom of the late 90s for reference if you want and you can see that they become progressively quicker.

charlesdm4• 8 years ago

1. Most bubbles are not global but geographically restricted in some way; crypto is global.

2. There is some value to Blockchain technology, so the value is not $0.

3. When comparing, given all of these assets had a starting value of effectively $0 at launch, you should probably look at them from an angel investment PoV. Peter Thiel got similar returns when investing in Facebook.

I'm not saying crypto is (entirely) comparable to Facebook in value (it might, it might not -- too early), but that's how I think the gains could make sense. It's valued like an internet startup, and then some.

4. The global market is still tiny? The entire crypto space is $550bn in market cap. Facebook is $552bn in market cap.

Valuations have probably gotten ahead of themselves and a lot of the smaller coins will die eventually, but it's still a blip in the grand scheme of things.

5. There is too much capital in the world. Too much cheap debt. Too much free money. This will fuel the mania. You could have put $2m in the stock market in 2008-2009, and if you used leverage in a smart way, could have ended up with $75-100m.

sorokod• 8 years ago

Was there ever a "epidemiological" study of financial bubbles?

efoto• 8 years ago

This is exactly the idea Robert Shriller suggests in his recent Narrative Economics lecture.

https://youtu.be/b8l6wLSPnYY

Charizma3• 8 years ago

Suppose he was a master of seeing trends till his last days. All this happened when Newton was almost 80 years old. However, he died 7 years later happily as one of most famous people of all times.

dnautics3• 8 years ago

Was he really happy? Newton was generally an angry loner who spent a lot of effort demeaning his peers.

Charizma3• 8 years ago

He died happily by demeaning his peers which were happy because they made a good money from South Sea stocks. :)

pimmen2• 8 years ago

I read about it first in The Intelligent Investor By Graham, but it's nice to get a more in depth description of this anecdote.

One of my friends once asked me how the growth in cryptocurrency value i an unsustainable bubble when so many smart and math proficient people believe in it. This is a handy bit of Newton trivia to make the point that the intelligent investor is not necessarily the one with the best math proficiency but the one who understands and abuses market folly. When everyone goes right look if there's anything of value people might've missed to the left.

gautamnarula• 8 years ago

Smart people moving into cryptocurrency and cryptocurrency being a bubble aren't mutually exclusive in another way: the long term potential of cryptocurrencies could be valid, even if it's in a short term bubble.

I think there are a lot of parallels between cryptocurrency/block chain tech now and the dot com bubble in the 90s. During the dot com bubbles fortunes were made and lost over nothing and there were many scams and vaporware business, but the underlying tech was sound and if you could identify the real businesses (e.g. Amazon, eBay) from the trash you could still make a lot of money in the long term even as the bubble popped and the market crashed. In a way, the bubble popping was good in a 'creative destruction' sort of way for clearing the brush (scammy and terrible companies) so the real ones could emerge and thrive. I think something similar will happen with cryptocurrency and blockchain tech.

godelmachine4• 8 years ago

This article kind of changed my life perspective in so many ways. Till now, I always believed that Newton & Einstein were "otherworldly" scientists who never dabbled in earthly mortal ventures like equity , SIP, mutual funds etc. Now I realize they had to worry about their subsistence & daily bread just as I need to.

walrus1066• 8 years ago

Also, that even the smartest of us are vulnerable to the power of greed, 'fear of missing out' and herd mentality, to trump rational thought/judgement.

It is why we will always have financial bubbles and scams.

godelmachine4• 8 years ago

Agree with you, but I always thought highly of Newton coz he died a virgin. Not that I aspire to be like him :D But he was a hardcore scientist through & through. Maybe that's why I always thought of him as "out of this world" genius.

dharmab• 8 years ago

For those who want an accessible introduction to the South Sea Bubble, Extra History has a video series on the causes and aftermath: https://www.youtube.com/watch?v=k1kndKWJKB8&list=PLEb6sGT7oD...

sinnet3000• 8 years ago

Thanks for that link! It's really ironic I was getting ads of a Mexican bitcoin exchange while watching this!

Newton’s Financial Misadventures in the South Sea Bubble [pdf]

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