I just finished reading a very interesting paper by Syracuse law professor Chris Day, which tells a contrarian story of some famous bubbles:
Markets are sometimes accused of "irrational exuberance." Some distrust stock markets because of "predatory" behavior by speculators. Three fantastic bubbles - Tulip mania, the Mississippi Company and the South Sea Company are held out as horrid examples of market excess and malfunction by the public and sophisticated commentators alike.
Tulip mania never occurred and was, instead, a rational attempt to organize markets for rare commodities in a primitive futures market. The Mississippi Company collapse and the loss of liquidity in France are linked to the South Sea Bubble. Both the Mississippi Company and South Sea Company were spectacular investments with major structural flaws. But they were not morality tales.
This paper delves into the economics, finance, psychology, legality and morality of these bubbles. It demonstrates that the markets often worked rationally and efficiently, that the investments were not wildly unsound, and that exogenous factors (the Plague in Holland) and politics and illegality in France may have played major roles in these "disasters." The paper concludes that markets got it right and that popular wisdom has failed to appreciate the market's wisdom.Fascinating stuff and highly persuasive.
