Financial market can go mad: evidence of irrational behaviour during the South Sea Bubble

Richard S. Dale, Johnnie Johnson, Leilei Tang

Research output: Contribution to journalArticle

40 Citations (Scopus)

Abstract

This paper explores investor behaviour during the South Sea Bubble - the first major speculative boom and bust on the stock markets. Previous literature debates whether investors during this episode acted rationally. Newly acquired data involving parallel markets for the South Sea Company's stock and subscription receipts are analysed, and widening valuation gaps are observed between these substitutable financial instruments. Rational explanations do not prove adequate, and the anomalies are explained by the biased decision-making of investors, and their tendency to view financial markets as wagering markets. The implications of these findings for the current debate on rationality in financial markets are identified.
Original languageEnglish
Pages (from-to)233-271
Number of pages38
JournalEconomic History Review
Volume58
Issue number2
DOIs
Publication statusPublished - May 2005

Keywords

  • financial market
  • irrational behaviour
  • South Sea Bubble
  • investors
  • decision making
  • wagering markets
  • financial instruments

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