Exchanges, bubbles and central banks · 1600s–1790s
1720
The South Sea and Mississippi bubbles
Shares in two government-backed companies soar and crash, and Britain passes the Bubble Act.
In 1720 shares in Britain's South Sea Company and France's Mississippi Company rose many times over on promises of trade profits, then crashed. Isaac Newton is said to have lost heavily.
Britain's Bubble Act of 1720 restricted new joint-stock companies without a royal charter for over a century.
💡 Why it made sense then
Easy credit, new ways to buy shares and stories of fortunes drew in people who didn't know what the companies were worth.
Ideas it gave us
- 🏗️ Market bubble
A market bubble is when prices rise far above any reasonable measure of value because buyers expect to sell to someone else at a higher price, until confidence breaks and prices crash.
- 🏗️ Information asymmetry
Information asymmetry is when one side of a deal knows more than the other. It can cause adverse selection, where bad products or risks drive out good ones.
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