Newton's Financial Misadventures in the South Sea Bubble

33 Pages Posted: 13 Nov 2017 Last revised: 28 Mar 2018

See all articles by Andrew Odlyzko

Andrew Odlyzko

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

Date Written: February 10, 2018

Abstract

One of the most popular investment anecdotes relates how Isaac Newton, after cashing in some large early gains, staked his fortune on the success of the South Sea Company of 1720 and lost heavily in the ensuing crash. However, this tale is based on only a few scraps of hard evidence, some of which are consistently misquoted and misinterpreted. Much of what has been published is embellished with questionable flourishes. A superficially plausible contrarian argument has also been made that he did not lose much in that period, and John Maynard Keynes even claimed Newton successully surmounted the South Sea Bubble. This paper presents extensive new evidence that while Newton was a successful investor before this event, the folk tale about his making large gains but then being drawn back into that mania and suffering large losses is almost certainly correct. It probably even understates the extent of his financial miscalculations. Incidentally to the clarification of this prominent issue, a controversy between Dale et al. and Shea about an aspect of market rationality during that bubble is settled. Some new information is also presented about Thomas Guy, famous for making a fortune out of the Bubble that paid for the establishment of Guy's Hospital, and other investors. The work reported here suggests new research directions and perspectives on bubbles.

Keywords: South Sea Bubble, Isaac Newton, investment manias, market efficiency

JEL Classification: B15, E43, G10, G11, G12, G14, G24, H63, H81, N23

Suggested Citation

Odlyzko, Andrew, Newton's Financial Misadventures in the South Sea Bubble (February 10, 2018). Available at SSRN: https://ssrn.com/abstract=3068542 or http://dx.doi.org/10.2139/ssrn.3068542

Andrew Odlyzko (Contact Author)

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

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

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