Monday, February 01, 2010

Efficient Market Hype?

Collective Hallucinations and Inefficient Markets: The British Railway Mania
of the 1840s

Andrew Odlyzko, University of Minnesota Working Paper, January 2010

Abstract: The British Railway Mania of the 1840s was by many measures the greatest
technology mania in history, and its collapse was one of the greatest financial crashes. It has attracted surprisingly little scholarly interest. In particular, it has not been noted that it provides a convincing demonstration of market inefficiency. There were trustworthy quantitative measures to show investors (who included Charles Darwin, John Stuart Mill, and the Bronte sisters) that there would not be enough demand for railway transport to provide the expected revenues and profits. But the power of the revolutionary new technology, assisted by artful manipulation of public perception by interested parties, induced a collective hallucination that made investors ignore such considerations. They persisted in ignoring them for several years, until the lines were placed in service and the inevitable disaster struck. In contrast to many other bubbles, the British Railway Mania had many powerful, vocal, and insightful critics. But the most influential of them suffered from another delusion, which misled them about the threat the Mania posed. As a result, their warnings were not persuasive, and were likely even counterproductive, as they may have stimulated increased investments. The delusions that led to the financial disaster of the Railway Mania arose from experience with the railway mania of the mid-1830s. Seldom even mentioned in the literature, it was about half the size of the big Railway Mania of the 1840s (and thus still far larger than the Internet bubble). The initial financially exuberant phase of it did collapse. But it appears to have been unique among large manias in that a few years later it was seen as having collapsed prematurely, as projects started during its exuberant phase became successful. That mania demonstrates the difficulty in identifying bubbles that are truly irrational. Both railway manias provide a variety of other lessons about the interaction of technology and financial markets.


(Nod to Kevin L)

2 comments:

Unknown said...

I'm hope the author notes in his paper that the Bank of England slashed interest rates leading up to the period. See: http://www.measuringworth.org/datasets/interestrates/result.php
I hope he also mentions that rights to build a railroad required an act of parliament, who passed 272 acts setting up new railway companies and proposed routes totaling 9,500 miles (in tiny Britain).
--- companies gaining special favors from government does not constitute a market failure.

seslimuhabbet said...

Really trustworthy blog. Please keep updating with great posts like this one. I have booked marked your site and am about to email it to a few friends of mine that I know would enjoy reading
Sesli sohbet Sesli chat
Seslisohbet Seslichat
Sesli sohbet siteleri Sesli chat siteleri
Sesli Chat
Sohbet Sesli siteler
Sohbet siteleri Chat siteleri
Sohbet merkezi chat merkezi
Sesli merkezi sesli Sohbet merkezi
Sesli chat merkezi Sohbetmerkezi
Sesli Sohbet Sesli Chat
SesliSohbet Sesli chat siteleri
Sesli sohbet siteleri SesliChat
Sesli Sesli siteler
Seslimuhabbet sesli muhabbet
sesli sohbet sesli chat siteleri
sesli sohbet siteleri sesli chat
seslisohbet seslichat
seslikent sesli kent
sesli sohbet sesli sohbet siteleri
sesli chat sesli chat siteleri
seslisohbet seslichat