Thursday, April 30, 2015

Paper: "Collective hallucinations and inefficient markets: The British Railway Mania of the 1840s"

Collective hallucinations and inefficient markets: The British Railway Mania of the 1840s [PDF] by Andrew Odlyzko

The British Railway Mania of the 1840s was by many measures the greatest technology mania in history, and its collapse was one of the greatest financial crashes. It has attracted surprisingly little scholarly interest. In particular, it has not been noted that it provides a convincing demonstration of market inefficiency. There were trustworthy quantitative measures to show investors that there would not be enough demand for railway transport to provide the expected revenues and profits. But the power of the revolutionary new technology, assisted by artful manipulation of public perception by interested parties, induced a collective hallucination that made investors ignore such considerations. They persisted in ignoring them for several years, until the lines were placed in service and the inevitable disaster struck.


jHurt said...

Tesla! Pretty sure there's a good chance i'd go broke trying to short that though. hence my staying the f away from it

CP said...

The collapse of the Railway Mania provides interesting perspectives on the development of capital markets. The accounting revolution was just one of the byproducts of the collision of investors’ rosy profit expectations with cold reality. Shareholders’ struggles to understand, or, more precisely, to avoid understanding, the inevitability of ruin, have many similarities to the events of recent financial crashes. The Railway Mania events thus provide cautionary notes on what even penetrating accounting and financial analysis reports can accomplish