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Strathprints serves world leading Open Access research by the University of Strathclyde, including research by the Strathclyde Institute of Pharmacy and Biomedical Sciences (SIPBS), where research centres such as the Industrial Biotechnology Innovation Centre (IBioIC), the Cancer Research UK Formulation Unit, SeaBioTech and the Centre for Biophotonics are based.

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Financial market can go mad: evidence of irrational behaviour during the South Sea Bubble

Dale, Richard S. and Johnson, Johnnie and Tang, Leilei (2005) Financial market can go mad: evidence of irrational behaviour during the South Sea Bubble. Economic History Review, 58 (2). pp. 233-271. ISSN 0013-0117

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Abstract

This paper explores investor behaviour during the South Sea Bubble - the first major speculative boom and bust on the stock markets. Previous literature debates whether investors during this episode acted rationally. Newly acquired data involving parallel markets for the South Sea Company's stock and subscription receipts are analysed, and widening valuation gaps are observed between these substitutable financial instruments. Rational explanations do not prove adequate, and the anomalies are explained by the biased decision-making of investors, and their tendency to view financial markets as wagering markets. The implications of these findings for the current debate on rationality in financial markets are identified.