An Undertaking of Great Advantage, But Nobody to Know What It Is

BUBBLES AND GULLIBILITY

By Andrew Odlyzko ever-popular Extraordinary Popular deposit, would be entitled to [£100] Delusions and the Madness of Crowds. per annum per share. How this One of the most famous anecdotes in It was first published in 1841 under immense profit was to be obtained, he finance is of a promoter in the 1720 South a slightly different title and had the did not condescend to inform them Sea Bubble who lured investors into put- following account, which was basically at that time, but promised, that in a ting money into “an undertaking of great copied from John Oldmixon’s The His- month full particulars should be duly advantage, but nobody to know what it tory of England a century earlier: announced, and a call made for the is.” This tale is apocryphal, but it is only a remaining [£98] of the subscription. [T]he most absurd and preposterous slight embellishment of some documented Next morning, at nine o’clock, this of all [the new projects of 1720 in cases. Most were slightly less preposterous great man opened an office in Corn- London], and which showed, more than the anecdotal one, when considered hill. Crowds of people beset his door, completely than any other, the utter in the context of the time, but they all and when he shut up at three o’clock, madness of the people, was one started reflect the high level of credulity dis- he found that no less than one thou- by an unknown adventurer, entitled played by the investors of 1720. However, sand shares had been subscribed for, “A company for carrying on an under- it is debatable whether their gullibility was and the deposits paid. He was thus, in taking of great advantage, but nobody greater than that of the most sophisticated five hours, the winner of [£2,000]. He to know what it is.” Were not the fact investment professionals in recent times. was philosopher enough to be con- stated by scores of credible witnesses, This leads to some intriguing thoughts tented with his venture, and set off the it would be impossible to believe that about the nature of financial markets and same evening for the Continent. He any person could have been duped by human society in general. was never heard of again. such a project. The man of genius who A reference that is often cited for essayed this bold and successful inroad Note that although this project is this and other colorful tales of inves- upon public credulity, merely stated described by Mackay as “absurd and prepos- tor irrationality is Charles Mackay’s in his prospectus that the required terous,” it did promise “full particulars” of capital was half a million, in five thou- the scheme in a month. Is that much differ- Image of the South Sea Bubble, by artist sand shares of [£100] each, deposit [£2] ent from what happens today when people Edward Matthew Ward (1816–1879). per share. Each subscriber, paying his give their savings to investment managers,

16 FINANCIAL HISTORY | Winter 2020 | www.MoAF.org venture capitalists or, even more, to general South Sea Bubble from mid−1719 to end of 1720 “blind pools”? Such investors do not find out “full particulars” of what is done with their money for quite a while. Just how much was this £2,000 that the “great man” of the Mackay version of the story is supposed to have made? Based on GDP per capita, which grew by about South 1,000 over the last three centuries, the Sea gains reaped by the projector are compa- Stock rable to about £2 million, or $2 million today. That is not shabby. But it pales when compared to the sums collected by pro- moters of the innumerable ICOs (initial coin offerings) in the last few years. Various observers have doubted the literal truth of the anecdote, and some details in the Oldmixon/Mackay narrative are simply not consistent with how new ventures were startups x10 set up in 1720. The most plausible scenario is that this story is an amalgam and embel- 0 200 400 600 800 1000 lishment of several actual occurrences, an 1719.5 1720 1720.5 1721 South Sea stock price and monthly number of start-ups multiplied by 10 account that is “too good not to be true.” South Sea Stock price of startups and monthly number 10 by multiplied But it is only a slight embellishment. Old- yearYear mixon’s version of this story concluded with Figure 1. South Sea stock price and the number of new projects announced an observation about the irrational behavior in London each month from July 1719 to December 1720. The scatter plot shows that crowd psychology lures investors into. 10 times the number of start-ups each month, so that the one for June 1720 corresponds He wrote that, “What, at another time, when to the 88 ventures that, according to one count, were announced that month. people were in their senses, and knew what to do with their money, would have occa- and investors’ “animal spirits” were £0.05 each. No names of projectors, sional a hue and cry after the cheat, was then stirring. The ebullient atmosphere nor details of the scheme were cited. only a matter of laughter, and the crime and of 1719 offered new opportunities to The sale of the “permits” took place on the sum hardly thought worth taking notice promoters, and they began soliciting Thursday, December 24. Two days later, of.” And that seems very accurate, as specula- money from investors. Figure 1 shows, this same paper had an ad which offered tive excitement does warp people’s percep- in the scatter plot, the number of new refunds for the “several hundred” of tion of what is sensible. It did so in 1720, projects announced each month, but those permits that had been sold and and does so today. multiplied by 10, so that the 88 projects explained that the whole thing was a Before considering projects from the of June 1720 correspond to 880 in the hoax designed to show how easy it was 1720 era that may have contributed to the figure. These numbers are taken from to “impose upon a credulous multitude.” creation of the anecdote, let us say a few William Scott’s The Constitution and The ad mentioned that the person who words on the background of the South Sea Finance of English, Scottish and Irish had collected the money was unknown to Bubble. There is much publicly available Joint-stock Companies to 1720. As can anyone in the crowd, and signed receipts material on this historical event online. A be seen, out of the almost 200 projects with a name made up from the initials of short overview is available in a chapter in that Scott tabulated, only 13 were started the six people who concocted the scheme. Edward Chancellor’s book, Devil Take the in 1719. But they were noticed by many While this spoof did show that British Hindmost. The main book-length recent observers. Also noticed was what seemed investors were “a credulous multitude,” it treatment is in John Carswell’s The South to many skeptics to be the inordinate was far less extreme than the Oldmixon/ Sea Bubble. This episode of extreme inves- credulity of the public that was eager to Mackay fable. Even if all 1,000 permits tor excitement had huge financial flows get involved. This led to the first of the were sold, the total take was only £50, not centered on the South Sea Company. Fig- events that likely inspired the “under- the £2,000 of the fable. Furthermore, for ure 1 shows the price of its main security. taking of great advantage, but nobody to an individual buying a single permit, the The South Sea Bubble was largely know what it is” fable. price of £0.05 was only the cost of a dozen inspired by John Law’s Mississippi Starting on Friday, December 18, cups of coffee. So the “credulous multitude” Scheme in Paris, which reached its peak 1719, the Daily Post carried for sev- were not risking very much individually. at the end of 1719. Both the French and eral days an ad for an “extraordinary Furthermore, they were not putting their the British manias were enabled by the scheme for a new insurance company money into an “undertaking …nobody return to relative peace and tranquility to be proposed, (whereof publick notice to know what it is,” but into an insur- after several prolonged and debilitat- will speedily be given in this paper),” ance scheme. Actuarial science was in its ing wars. Interest rates were dropping, with “permits to subscribe” offered for infancy, so insurance was underdeveloped,

www.MoAF.org | Winter 2020 | FINANCIAL HISTORY 17 and there were some sound reasons for expecting growth in that area. The “permit” process visible in the Daily Post ads was indeed how pro- motions of that period were started. Investors would put down very minor amounts for a permit, often the £0.05 of the ads. This permit would entitle them to become shareholders later. It was only at that later subscription stage, typically weeks afterwards, that the more substantial amounts, such as the £2 per £100 share of the Oldmixon/ Mackay fable, were asked for. That stage, reached by very few of the South Sea Bubble projects, made them more con- crete. It involved shareholder meetings, elections of management, and participa- tion of known bankers as collectors and custodians of the money being invested. A week after the nature of the spoof was unveiled—on January 2, 1720—another paper, the Weekly Packet, carried a para- graph about it. It treated the event as a Image courtesy Ballad Archive. of the English Broadside “The Bubblers bubbled, or the Devil take the hindmost.” This cartoon humorous and praiseworthy joke, express- was printed in June 1720, at the height of the South Sea Bubble. ing the hope it would “prove a means of preventing many innocent people being gulled of their money for the future.” A £200 billion for the UK, and $2 trillion for of promoters simply absconding with week later, Mist’s Weekly Journal had a the U.S. today). It was “carry on a design investors’ initial payments, as in the other much more detailed account. But this of more general advantage to Great- Brit- element of the anecdote. For example, the article also seemed to embellish the story, ain and Ireland, &c. and of more certain London Journal of June 11, 1720, the day perhaps part of the common trend by profit to the encouragers thereof, than any that the Bubble Act became law, noted: which the fable grew and acquired its undertaking yet set on foot: Of which About the middle of this week two or more colorful aspects as time went on. further notice will be given in this paper.” three of our famous projectors took In spite of the ads that revealed the Soon the atmosphere became even more care to put themselves out of the reach nature of the joke, and the publicity in the frenzied, largely because of the impending of the new Act of Parliament for sup- Weekly Packet and Mist’s Weekly Journal, passage of the Bubble Act, which outlawed pressing of bubbles; for having got speculative excitement continued grow- most new companies. For example, on June their subscriptions full, they closed ing, and many investors were “gulled of 8, the Daily Post had an ad for a company their books, shut up their offices, and their money.” It should be said that the “for carrying on a thing that will turn to fairly marched off with five or six hun- British press during the South Sea Bubble the advantage of the concerned” with no dred pounds a-piece in their pockets, in was somewhat split in its coverage of the indications what that “thing” was. But we order to secure to themselves the sole South Sea scheme itself, where the really should note that this was just the newspa- benefit of such laudable undertakings. big money went. However, this press was per ad, and it is quite possible that when almost uniformly scornful of the myriad prospective investors showed up in the We don’t have any statistics on how fre- new projects, the “bubbles” in the language indicated place for purchasing “permits,” quent such occurrences were. This might of the time. With a few exceptions, they they did receive at least some outlines of a be partly because, in Oldmixon’s words were presented as frauds, designed just to business plan. If so, it would be similar to cited before, in the atmosphere at the peak fleece the public. But such publicity did not modern venture capital funds, where inves- of the Bubble, when “people were [not] have much effect. Ads similar to the hoax tors typically are told in advance that it is in their senses,” such events were “only a from December 1719 proliferated as the to concentrate in the biomedical area, say. matter of laughter.” Bubble was inflating in early 1720. Almost It is possible that there was even a A likely reason that it was “only a matter all were for well-defined purposes, even project that did advertise itself literally as of laughter” when some promoters made if those seemed to skeptical minds to be “an undertaking of great advantage, but off with initial deposits is that much greater chimerical. But several featured elements nobody to know what it is,” since Mercu- sums were being abstracted from investors’ of the “nobody to know what it is” mystery. rius Politicus for June 1720 listed it, and pockets by more elaborate maneuvers. A For example, the May 21, 1720 issue of the Political State of Great Britain for July 1720 venture that proved popular would see the Daily Post carried an ad for raising £6 mil- reprinted that listing. value of the permits soar, and any held back lion (so comparable, relative to GDP, to There were also contemporary reports by the promoters in the initial stage could

18 FINANCIAL HISTORY | Winter 2020 | www.MoAF.org be sold at high prices. If the project went businesses, such as trade or insurance, to extensions of credit, which is what to actual subscription phase, more money which were developing rapidly. leverage is about. Thus, there might be would go through promoters’ hands, and if Thus, there is some ground for con- ways to use historical knowledge to help prices of the shares rose, there were more sidering the many minor bubbles of the us prepare for the future. Credulity is chances for astute operators to fleece inves- South Sea Bubble as outgrowths of the basic to human nature, and likely essen- tors. Of course, not all promoters were exuberant optimism of that era. And they tial to stimulating progress. But we could astute, and many were ruined themselves. are not necessarily more absurd than benefit from being able to rein it in. The That’s how it is in all investment manias. many examples from the dot-com era, famous “undertaking of great advantage, Unfortunately, we simply don’t have any like eToys or Webvan, or the more recent but nobody to know what it is” likely systematic data on what happened with the WeWork fiasco. Even the fact that most of never existed. But this memorable phrase new projects of the South Sea Bubble era. the South Sea projects were dishonest in is a nice way to keep reminding the public The main issue in investing is the design is not unusual, as widespread fraud about excessive gullibility. degree of plausibility of new ventures that has been typical of investment manias. should be demanded. After all, there was One study in early 2018 characterized Andrew Odlyzko has had a long career some plausibility to the stories told by the over 80% of the ICOs as “outright scams” in research and research management at various people who “sold” the Brooklyn (Kharif). Further, while bubbles have a Bell Labs, AT&T Labs and, most recently, Bridge. And there is some plausibility in very negative image, they have made posi- at the University of Minnesota, where he the emails telling us about a forgotten tive contributions to society, by spurring built an interdisciplinary research center inheritance, of which we can get a large development of new technologies and new and is now a Professor in the School of chunk by assisting the senders of the spam. business models. Mathematics. He has written over 150 And there was even greater plausibility in Yet, to twist the famous quote of Mae technical papers in computational com- the stories that Adam Neumann told in West, “too much of a good thing” is not plexity, cryptography, number theory, building up WeWork. The key issue is always “wonderful.” In investments, exces- combinatorics, coding theory, analysis, human judgment of what is sensible. sive credulity all too often leads to panics probability theory and related fields. In At the peak of a mania, it is often dif- and crashes. And those are sometimes fol- recent years he has also been working ficult to tell the difference between satire lowed by costly and painful recessions or in electronic commerce, economics of and reality. As just one example from our depressions. So can we use history to help data networks and economic history, era, consider WeWork’s stated mission to develop guidelines for detecting dangerous especially on diffusion of technological “elevate the world’s consciousness.” Several bubbles? The task is certainly not easy, and innovation. compilations of South Sea Bubble projects it seems unlikely that a foolproof method list three for building or emptying toilets. can be found. But one approach is to try Sources Carswell in his book says ads for those ven- to develop a gullibility index. One element tures were “inserted as pure jokes, which of it might be the susceptibility of people Carswell, John. The South Sea Bubble.2nd ed. have imposed only on historians” (p. 117). to those spam emails or phone calls that Sutton Publishing Ltd. 1993. But they may not have been jokes, as they offer a share in some forgotten inheritance. Chancellor, Edward. Devil Take the Hind- were treated seriously by most contempo- Another might be the expectations of prof- most: A History of Financial Speculation. raries (cf. Mist’s Weekly Journal, February its that passive corporate investments can Farrar, Straus and Giroux. 1999. 27, 1720). And then there is the South Sea achieve, which tend to soar during bubbles, Kharif, Olga. “How’s That ICO Working scheme itself, the centerpiece of the South with the 100% annual return promised in Out? Breaking Down the Biggest ICOs Sea Bubble. That is where the main money the Oldmixon/Mackay tale not unusual. From the Past Few Years.” Bloomberg flows were concentrated, and by some mea- Yet another might be derived from the Business Week. December 17, 2018. sures it was the most preposterous of all nature of the new projects being offered Mackay, Charles. Memoirs of Extraordinary financial proposals of that era. But we don’t to the public. What we find in the South Popular Delusions. London: Richard treat it here. Sea Bubble as well as in other manias is a Bentley. 1841. Some of the seemingly preposterous myriad of imitative ventures without any small projects of the South Sea Bubble are innovative contribution, concocted out of Odlyzko, Andrew M. “Bubbles, Gullibility not all that farcical when considered in the nothing by promoters with no successes and Other Challenges for Economics, context of that era. Alchemy was still being in their records. (Think of the hundreds of Psychology, Sociology and Information taken seriously, and even Isaac Newton ICOs, for a modern example.) Sciences.” First Monday. Vol. 15, No. 9. had devoted some years to it a couple of Many standard approaches to detect- September 2010. decades earlier. So extracting silver out of ing bubbles rely on looking for dangerous Oldmixon, John. The History of England: lead was not as absurd then as it is now. levels of leverage in the financial system. During the Reigns of King William and Similarly, perpetual motion was far more However, leverage is not easy to measure, Queen Mary, Queen Anne, King George respectable then, and patents for it contin- since it can show up in various ways I. Being the Sequel of the Reigns of the ued to be granted in Britain into the early and in unexpected places (largely in the Stuarts. T. Cox. 1735. 19th century. Thus, simply looking at the “shadow banking system” prior to the Scott, William R. The Constitution and stated aims of various bubbles from 1720 Global Financial Crisis of 2007–2008). A Finance of English, Scottish and Irish is rather misleading. And the vast majority gullibility index might be useful, since it Joint-stock Companies to 1720. Cam- of the projects were for relatively mundane is the rise in investors’ hopes that leads bridge University Press. 1910–12.

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