From 1720 to Tesla, FOMO Never Sleeps: The South Sea bubble is the classic story of an investing mania. Are investors today any wiser?

By Jason Zweig. I like articles like this that link economics and storytelling. In fact, I have another blog called Dollars and Dragons: A look at the intersection of economics and mythology. If humans are the storytelling animal (which is the name of a book by Jonathan Gottschall), then it wi worth looking at how stories affect or play out in the economy.

Excerpts from Zweig's article:

"In the summer of 1720, shares in the South Sea Co. and other leading stocks roared to all-time highs as speculators chased instant profits. Ever since, this sudden outbreak of stock trading has been known as “the South Sea bubble.” Even faster than it inflated, it burst—and left us with lessons about human nature that reverberate today.

From July 10 through July 12, 1720, South Sea shares perched at £950, up 650% for the year. Royal Exchange Assurance and London Assurance crested in late August, up an astonishing 1,243% and 4,220% for the year, respectively.

Then, in three catastrophic weeks in September, it all began crashing down. By the end of 1720, these leading stocks had fallen between 81% and 96% from their peak."

"They all were sucked in by a perfect magnetic storm: the rapid advent of newspapers, ready loans at low interest rates, and exciting narratives about technological innovation. Above all was the eternal human desire to be part of the in crowd, or what we today would call FOMO, fear of missing out."

"Bubbles are as old as financial markets. Even in ancient Babylon, commodity prices took sudden leaps and falls that can’t be fully explained by weather or war."

"In 1720 . . That June alone, 88 startups, most of them publicly traded, were launched in London. Many sought to raise £1,000,000 to £5,000,000 apiece (roughly $190 million to $945 million in today’s money)"

"Fistfights broke out over the right to buy stock while it still could be had; speculators thronged London’s financial district to buy shares in any company, desperately pleading, “we don’t care what it is.”"

"New media technologies—newspapers in 1720, radio in the 1920s, the internet in the 1990s, social media and smartphone apps today—are “the cultural substrate in which a mania can grow,” says William Deringer, a financial historian at the Massachusetts Institute of Technology.

As word spreads that “everybody” is doing something, it can be hard for anybody to resist joining."

"Imitation isn’t always irrational, either. It helped our ancestors save mental and physical labor and adapt more quickly to changing environments"

"That can quickly coalesce into a narrative, in which our imaginations rapidly transport us to different places and times. (“I’ll become rich, just like they did.”) A good story, as the poet Samuel Taylor Coleridge wrote, automatically triggers a “willing suspension of disbelief for the moment.”

"The South Sea bubble brimmed with “story stocks.”"

Like companies could "develop an “air pump for the brain,” convert sewage into gunpowder"

"The South Sea Co. had its own story: Originally created to sell enslaved people to Spain’s American colonies, by 1720 it had morphed into a complex scheme for refinancing the British government’s massive war debts."