Skip to main content

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! 


Popular posts from this blog

How Valuable Are Connections?

Daron Acemoglu, Simon Johnson, Amir Kermani, James Kwak and Todd Mitton have written a paper on whether firms connected to Timothy Geithner benefited from these connections. They do so by looking at how stocks of these firms reacted to the announcement that he was a nominee for Treasury Secretary in November 2008. They find that there were large abnormal returns for connected firms. Below is the paper's abstract and the full paper is available here . The announcement of Timothy Geithner as nominee for Treasury Secretary in November 2008 produced a cumulative abnormal return for financial firms with which he had a connection. This return was about 6% after the first full day of trading and about 12% after ten trading days. There were subsequently abnormal negative returns for connected firms when news broke that Geithner's confirmation might be derailed by tax issues. Excess returns for connected firms may reflect the perceived impact of relying on the advice of a small ne...

Boom and Bust: A Global History of Financial Bubbles

Boom and Bust: A Global History of Financial Bubbles, co-authored with my colleague Will Quinn , is forthcoming in August. It is published by Cambridge University Press and is available for pre-order at Amazon , Barnes and Noble , Waterstones and Cambridge University Press . 

Money, Money, Money

In my copious spare time, I am a notaphilist (i.e., a collector of bank notes).  In the not too distant past, individual banks issued their own notes.  However, today, apart from in N. Ireland and Scotland, central banks around the world have a monopoly of the note issue in most economies.   At Feb. 2011, Northern Irish and Scottish banks had a staggering £1,900m and £3,500m of notes in circulation respectively.   As regular travellers across the Irish Sea realise, these notes are not legal tender.   What is special about banks in N. Ireland and Scotland that they can issue their own notes?  Simply, it is an accident of history.  As legislation was passed which centralised the note issue in England in the Bank of England, Scottish and Irish banks were given certain exemptions.  The result today is that these banks can issue their own notes. N. Irish and Scottish Banks, however, have to hold backing assets (i.e., Bank of England reserve...