was during the South Sea Bubble.[17] Founded in 1711, the British
South Sea Company controlled several trading and slavery contracts
in the Americas. In 1719, they secured a lucrative financial deal with
the British government. The following year, the company’s share price
surged, rising four-fold in a matter of weeks, before falling just as
sharply a couple of months later.[19]
Price of South Sea Company shares, 1720
Data from Frehen et al., 2013[18]Isaac Newton had sold most of his shares during the spring of
1720, only to invest again during the summer peak. According to
mathematician Andrew Odlyzko, ‘Newton did not just taste of the
Bubble’s madness, but drank deeply of it.’ Some people timed their
investments better. Bookseller Thomas Guy, an early investor, got out
before the peak and used the profits to establish Guy’s Hospital in
London.[20]
There have been many other bubbles since, from Britain’s Railway
Mania in the 1840s to the US dot-com bubble in the late 1990s.
Bubbles generally involve a situation where investors pile in, leading
to a rapid rise in price, followed by a crash when the bubble bursts.
Odlyzko calls them ‘beautiful illusions’, luring investors away from
reality. During a bubble, prices can climb far above values that can be
logically justified. Sometimes people invest simply on the assumption