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Collective Hallucinations and Inefficient Markets: The British Railway Mania of the 1840s

322 Pages Posted: 18 Jan 2010  

Andrew Odlyzko

University of Minnesota - Twin Cities - School of Mathematics and Digital Technology Center

Date Written: January 15, 2010

Abstract

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 (who included Charles Darwin, John Stuart Mill, and the Bronte sisters) 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. In contrast to many other bubbles, the British Railway Mania had many powerful, vocal, and insightful critics. But the most influential of them suffered from another delusion, which misled them about the threat the Mania posed. As a result, their warnings were not persuasive, and were likely even counterproductive, as they may have stimulated increased investments.

The delusions that led to the financial disaster of the Railway Mania arose from experience with the railway mania of the mid-1830s. Seldom even mentioned in the literature, it was about half the size of the big Railway Mania of the 1840s (and thus still far larger than the Internet bubble). The initial financially exuberant phase of it did collapse. But it appears to have been unique among large manias in that a few years later it was seen as having collapsed prematurely, as projects started during its exuberant phase became successful. That mania demonstrates the difficulty in identifying bubbles that are truly irrational. Both railway manias provide a variety of other lessons about the interaction of technology and financial markets.

Keywords: Railway Mania, bubbles, market inefficiency, financial manias

JEL Classification: E27, E37, E44, G10, L92, N23, N73, O16, O33, O38, R42

Suggested Citation

Odlyzko, Andrew, Collective Hallucinations and Inefficient Markets: The British Railway Mania of the 1840s (January 15, 2010). Available at SSRN: https://ssrn.com/abstract=1537338 or http://dx.doi.org/10.2139/ssrn.1537338

Andrew Odlyzko (Contact Author)

University of Minnesota - Twin Cities - School of Mathematics and Digital Technology Center ( email )

127 Vincent Hall
206 Church St. SE
Minneapolis, MN 55455
United States
612-625-6413 (Phone)
612-626-2017 (Fax)

HOME PAGE: http://www.dtc.umn.edu/~odlyzko

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