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Railway Mania

Congratulations to Dr Gareth Campbell, a colleague and former PhD student, who has just had his paper entitled “Myopic Rationality in a Mania” accepted for publication by Explorations in Economic History.  This paper, which was the central chapter in his dissertation, argues that the British Railway Mania of the mid-1840s was not due to individual or collective investor irrationality.  This mania has been described as one of the greatest ‘bubbles’ in history as railway stock prices doubled in value between 1843 and 1845 and then subsequently collapsed over the rest of the decade.

Gareth’s main argument is that railway share prices were priced in a rational way given past, current and future railway dividends.  Where investors seemed to have come unstuck is that they did not fully anticipate the collapse in railway company dividends which took place in the late 1840s – in other words, they suffered from myopia. 

As we are living in the aftermath of a housing bubble, the questions raised by Gareth’s work are profound.  First, are there such things as financial ‘bubbles’?  Second, if bubbles are not irrational, what can governments ultimately do to prevent asset price reversals occurring in the first place?  Third, how should we adjust our economic models to take account of investor myopia?

Gareth’s work also highlights the need for a long-run perspective on finance and economics.  As bubbles are rare events, we need to look back in time to increase the number of observations we have so that we can better understand bubbles.  We need more research on historical bubbles! 

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