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The Strathprints institutional repository is a digital archive of University of Strathclyde research outputs. Strathprints provides access to thousands of Open Access research papers by University of Strathclyde researchers, including those from the School of Psychological Sciences & Health - but also papers by researchers based within the Faculties of Science, Engineering, Humanities & Social Sciences, and from the Strathclyde Business School.

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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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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.