Financial History Issue 132 (Winter 2020) | Page 21

be sold at high prices. If the project went
to actual subscription phase, more money
would go through promoters’ hands, and if
prices of the shares rose, there were more
chances for astute operators to fleece inves-
tors. Of course, not all promoters were
astute, and many were ruined themselves.
That’s how it is in all investment manias.
Unfortunately, we simply don’t have any
systematic data on what happened with the
new projects of the South Sea Bubble era.
The main issue in investing is the
degree of plausibility of new ventures that
should be demanded. After all, there was
some plausibility to the stories told by the
various people who “sold” the Brooklyn
Bridge. And there is some plausibility in
the emails telling us about a forgotten
inheritance, of which we can get a large
chunk by assisting the senders of the spam.
And there was even greater plausibility in
the stories that Adam Neumann told in
building up WeWork. The key issue is
human judgment of what is sensible.
At the peak of a mania, it is often dif-
ficult to tell the difference between satire
and reality. As just one example from our
era, consider WeWork’s stated mission to
“elevate the world’s consciousness.” Several
compilations of South Sea Bubble projects
list three for building or emptying toilets.
Carswell in his book says ads for those ven-
tures were “inserted as pure jokes, which
have imposed only on historians” (p. 117).
But they may not have been jokes, as they
were treated seriously by most contempo-
raries (cf. Mist’s Weekly Journal, February
27, 1720). And then there is the South Sea
scheme itself, the centerpiece of the South
Sea Bubble. That is where the main money
flows were concentrated, and by some mea-
sures it was the most preposterous of all
financial proposals of that era. But we don’t
treat it here.
Some of the seemingly preposterous
small projects of the South Sea Bubble are
not all that farcical when considered in the
context of that era. Alchemy was still being
taken seriously, and even Isaac Newton
had devoted some years to it a couple of
decades earlier. So extracting silver out of
lead was not as absurd then as it is now.
Similarly, perpetual motion was far more
respectable then, and patents for it contin-
ued to be granted in Britain into the early
19th century. Thus, simply looking at the
stated aims of various bubbles from 1720
is rather misleading. And the vast majority
of the projects were for relatively mundane
businesses, such as trade or insurance,
which were developing rapidly.
Thus, there is some ground for con-
sidering the many minor bubbles of the
South Sea Bubble as outgrowths of the
exuberant optimism of that era. And they
are not necessarily more absurd than
many examples from the dot-com era,
like eToys or Webvan, or the more recent
WeWork fiasco. Even the fact that most of
the South Sea projects were dishonest in
design is not unusual, as widespread fraud
has been typical of investment manias.
One study in early 2018 characterized
over 80% of the ICOs as “outright scams”
(Kharif). Further, while bubbles have a
very negative image, they have made posi-
tive contributions to society, by spurring
development of new technologies and new
business models.
Yet, to twist the famous quote of Mae
West, “too much of a good thing” is not
always “wonderful.” In investments, exces-
sive credulity all too often leads to panics
and crashes. And those are sometimes fol-
lowed by costly and painful recessions or
depressions. So can we use history to help
develop guidelines for detecting dangerous
bubbles? The task is certainly not easy, and
it seems unlikely that a foolproof method
can be found. But one approach is to try
to develop a gullibility index. One element
of it might be the susceptibility of people
to those spam emails or phone calls that
offer a share in some forgotten inheritance.
Another might be the expectations of prof-
its that passive corporate investments can
achieve, which tend to soar during bubbles,
with the 100% annual return promised in
the Oldmixon/Mackay tale not unusual.
Yet another might be derived from the
nature of the new projects being offered
to the public. What we find in the South
Sea Bubble as well as in other manias is a
myriad of imitative ventures without any
innovative contribution, concocted out of
nothing by promoters with no successes
in their records. (Think of the hundreds of
ICOs, for a modern example.)
Many standard approaches to detect-
ing bubbles rely on looking for dangerous
levels of leverage in the financial system.
However, leverage is not easy to measure,
since it can show up in various ways
and in unexpected places (largely in the
“shadow banking system” prior to the
Global Financial Crisis of 2007–2008). A
gullibility index might be useful, since it
is the rise in investors’ hopes that leads
to extensions of credit, which is what
leverage is about. Thus, there might be
ways to use historical knowledge to help
us prepare for the future. Credulity is
basic to human nature, and likely essen-
tial to stimulating progress. But we could
benefit from being able to rein it in. The
famous “undertaking of great advantage,
but nobody to know what it is” likely
never existed. But this memorable phrase
is a nice way to keep reminding the public
about excessive gullibility. 
Andrew Odlyzko has had a long career
in research and research management at
Bell Labs, AT&T Labs and, most recently,
at the University of Minnesota, where he
built an interdisciplinary research center
and is now a Professor in the School of
Mathematics. He has written over 150
technical papers in computational com-
plexity, cryptography, number theory,
combinatorics, coding theory, analysis,
probability theory and related fields. In
recent years he has also been working
in electronic commerce, economics of
data networks and economic history,
especially on diffusion of technological
innovation.
Sources
Carswell, John. The South Sea Bubble. 2nd ed.
Sutton Publishing Ltd. 1993.
Chancellor, Edward. Devil Take the Hind-
most: A History of Financial Speculation.
Farrar, Straus and Giroux. 1999.
Kharif, Olga. “How’s That ICO Working
Out? Breaking Down the Biggest ICOs
From the Past Few Years.” Bloomberg
Business Week. December 17, 2018.
Mackay, Charles. Memoirs of Extraordinary
Popular Delusions. London: Richard
Bentley. 1841.
Odlyzko, Andrew M. “Bubbles, Gullibility
and Other Challenges for Economics,
Psychology, Sociology and Information
Sciences.” First Monday. Vol. 15, No. 9.
September 2010.
Oldmixon, John. The History of England:
During the Reigns of King William and
Queen Mary, Queen Anne, King George
I. Being the Sequel of the Reigns of the
Stuarts. T. Cox. 1735.
Scott, William R. The Constitution and
Finance of English, Scottish and Irish
Joint-stock Companies to 1720. Cam-
bridge University Press. 1910–12.
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