Financial History Issue 132 (Winter 2020) | Page 18

An Undertaking of Great Advantage, But Nobody to Know What It Is BUBBLES AND GULLIBILITY By Andrew Odlyzko One of the most famous anecdotes in finance is of a promoter in the 1720 South Sea Bubble who lured investors into put- ting money into “an undertaking of great advantage, but nobody to know what it is.” This tale is apocryphal, but it is only a slight embellishment of some documented cases. Most were slightly less preposterous than the anecdotal one, when considered in the context of the time, but they all reflect the high level of credulity dis- played by the investors of 1720. However, it is debatable whether their gullibility was greater than that of the most sophisticated investment professionals in recent times. This leads to some intriguing thoughts about the nature of financial markets and human society in general. A reference that is often cited for this and other colorful tales of inves- tor irrationality is Charles Mackay’s Image of the South Sea Bubble, by artist Edward Matthew Ward (1816–1879). ever-popular Extraordinary Popular Delusions and the Madness of Crowds. It was first published in 1841 under a slightly different title and had the following account, which was basically copied from John Oldmixon’s The His- tory of England a century earlier: [T]he most absurd and preposterous of all [the new projects of 1720 in London], and which showed, more completely than any other, the utter madness of the people, was one started by an unknown adventurer, entitled “A company for carrying on an under- taking of great advantage, but nobody to know what it is.” Were not the fact stated by scores of credible witnesses, it would be impossible to believe that any person could have been duped by such a project. The man of genius who essayed this bold and successful inroad upon public credulity, merely stated in his prospectus that the required capital was half a million, in five thou- sand shares of [£100] each, deposit [£2] per share. Each subscriber, paying his 16    FINANCIAL HISTORY  |  Winter 2020  | www.MoAF.org deposit, would be entitled to [£100] per annum per share. How this immense profit was to be obtained, he did not condescend to inform them at that time, but promised, that in a month full particulars should be duly announced, and a call made for the remaining [£98] of the subscription. Next morning, at nine o’clock, this great man opened an office in Corn- hill. Crowds of people beset his door, and when he shut up at three o’clock, he found that no less than one thou- sand shares had been subscribed for, and the deposits paid. He was thus, in five hours, the winner of [£2,000]. He was philosopher enough to be con- tented with his venture, and set off the same evening for the Continent. He was never heard of again. Note that although this project is described by Mackay as “absurd and prepos- terous,” it did promise “full particulars” of the scheme in a month. Is that much differ- ent from what happens today when people give their savings to investment managers,