Financial Folly: The Cosmic Conundrum of Newton's South Sea Saga

I can calculate the motion of heavenly bodies, but not the madness of people.

Sir Isaac Newton

The story of Isaac Newton and the fortune he lost speculating on the South Sea Bubble of 1720 holds a timeless cautionary lesson for even the most brilliant investors.

Newton was no financial novice. As Master of the Royal Mint since 1699, he had a significant hand in running the country's finances. By 1720, he was an 80-year-old seasoned financier.

Still, he could not resist the siren call of the market mania that raged throughout the land.

At first, Newton profited wisely, selling his early South Sea Company stock for a tidy sum.

But later seized by greed and euphoria, Newton jumped back into the market just before its epic collapse.

Newton lost a crushing £20,000- over $3 million today.

About the same time, another famous skeptic, Thomas Guy, began to cash in his vast profits.

Guy sold 54,040 stock for £234,428, making a profit of about £175,000.

Guy's donation of £45,000 (about £96 million today) established Guy's Hospital-still one of London's most famous.

This famous tale is more than myth. Extensive new evidence confirms Newton rode the bubble up and then crashed down. It reveals how even genius does not protect from the delusion of crowds.

Initially, Newton doubted the South Sea hype. But as shares kept rising, he abandoned reason for the grip of the mania.

Newton proves intellectual firepower does not guarantee market success. As he admitted, calculating cosmic motions was easier than predicting human folly.

Lessons from Newton

The lessons from Newton's errors are timeless.

First, they show how an individual’s emotion overwhelms logic during bubbles. Investors interpret facts through irrational filters. Newton first evaluated South Sea shares shrewdly. But later, he ignored the same fundamentals.

Second, Newton's example also illuminates crowd psychology during financial manias. He shifted from initial skepticism to full enthusiasm. This change of heart was no doubt propelled the frenzy of the crowds. He had no understanding that he was infected by the mind virus of speculation. And that it spreads much like viruses, as mapped by modern epidemiologists.

Third, Newton's fate confirms that intelligence does not inoculate you against the madness of crowds. Newton's bubble experience remains the quintessential example of groupthink. Irrational exuberance can overwhelm even the market's most brilliant participants.

Isaac Newton was unquestionably a genius. But even genius has its limits. As Newton discovered, brilliance in one domain is no guarantee of success in another.

Newton as a Man of His Time

Today’s image of Newton is that of a hyperrational intellect with few rivals in history.

But as the economist John Maynard Keynes noted, with his interest in astrology and alchemy. Newton belonged as much to the ancient world of magic as to the modern age of reason.

Wrote Keynes:

Newton was not the first of the age of reason. He was the last of the magicians, the last of the Babylonians and Sumerians, the last great mind that looked out on the visible and intellectual world with the same eyes as those who began to build our intellectual inheritance rather less than 10,000 years ago.

Newton's bubble misadventure holds a timeless message. Even the greatest minds can't conquer the madness of crowds. When emotion overrides logic, intelligence alone is powerless. Success in speculation comes from recognizing our inherent human limitations. –

As a historian of financial speculation, Andrew Odlyzko concluded:

In the finance of the South Sea Bubble, as in astrology, (Newton) was standing in a swamp, and so even his brilliance did not save him from losses.