technology and financial bubbles manuscript]

[Dave Farber <dave () farber net>]

Begin forwarded message:

> From: Richard Shockey <richard () shockey us>
> Date: January 15, 2010 11:20:58 AM EST
> To: dave () farber net
> Subject: [Fwd: technology and financial bubbles manuscript]

> For IP ... great weekend reading
>
>
>
>   http://www.dtc.umn.edu/~odlyzko/doc/hallucinations.pdf
>
>
>         Collective hallucinations and inefficient markets:
>               The British Railway Mania of the 1840s
>
>                           Andrew Odlyzko
>
>                       School of Mathematics
>                   and Digital Technology Center
>                      University of Minnesota
>
>                           odlyzko () umn edu
>                   http://www.dtc.umn.edu/~odlyzko
>
>                 Preliminary version, January 14, 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.
>
>
>
>     <http://www.dtc.umn.edu/~odlyzko/doc/hallucinations.pdf>



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