Newton's financial misadventures in the South Sea Bubble

Abstract

A very popular investment anecdote relates how Isaac Newton, after cashing in 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 items of hard evidence, some of which are consistently misquoted and misinterpreted. 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 successfully 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. Incidental 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.