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Who Invests during Bubbles?

Gareth Campbell and I have just had a paper entitled “Dispelling the Myth of the NaïveInvestor during the British Railway Mania, 1845-46” published in Business History Review.  In the article, we present extensive evidence that investors during the Railway Mania, recently described by the Economist as the greatest bubble in history, were not naïve or irrational.  Our paper is one of the first serious attempts to look at who invests during asset price bubbles.  Our paper, of course, raises questions as to whether investors during other bubble episodes were naïve, inexperienced, and irrational. 

Here is the abstract:
Anecdotal evidence from the British Railway Mania and other historical financial bubbles suggests that many investors during such episodes are naive, thus contributing to the asset price boom.  Using extensive investor records, we find that very few investors during the Railway Mania can be categorized as such.  Although some interpretations of the Mania  suggest that naive investors were expropriated by railway insiders, our evidence is inconsistent with this view, as railway insiders contributed substantial amounts of capital, and their investments performed no better than those made by other experienced investors. 
 

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