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Dispelling the Myth of the Naive Investor during the British Railway Mania, 1845-1846

Journal: Business History Review

Date: 20120301

Author: Campbell, Gareth; Turner, John D.

Abstract:
Anecdotal evidence from the British Railway Mania and other historical financial bubbles suggests that many investors during such episodes are naive, thus contributing to the asset price boom. Using extensive investor records, we find that very few investors during the Railway Mania can be categorized as such. Although some interpretations of the Mania suggest that naive investors were expropriated by railway insiders, our evidence is inconsistent with this view as railway insiders contributed substantial amounts of capital, and their investments performed no better than those made by other experienced investors.

Link: Google Scholar

Background and Context

Historical Setting

The British Railway Mania of 1845-1846 was considered the greatest financial mania in history at that time, with over 1,000 new railway companies established and dramatic stock price reversals.

Research Question

The study examines whether railway investors during this period were truly naive and inexperienced as traditionally believed, and whether railway insiders exploited other investors.

Methodology

Analysis of extensive shareholder records, including parliamentary subscription lists from 1845-1846, Great Western Railway shareholder lists, and bank shareholder records to assess investor characteristics and investment performance.

Experienced Business and Upper Classes Dominated Railway Investment Capital

  • Merchants, gentlemen and businesspeople provided majority of investment capital
  • Supposedly naive investors (clergy, working class, women) contributed just 1.2% of capital
  • Demonstrates railway investment was dominated by experienced investors, not naive speculators

Railway Stock Prices Showed Clear Boom-Bust Pattern

  • Railway share index peaked at 1,984 in August 1845
  • Declined to 1,623 by November 1845
  • Reached low of 673 by April 1850

Local Investors Showed Superior Investment Performance

  • 34.7% of investments were made by shareholders living in railway's locality
  • Local investors earned higher returns than outside investors
  • Suggests local knowledge provided investment advantages

Railway Insiders Were Major Investors

  • Provisional committee members provided 18.5% of capital in their promoted schemes
  • Directors of established railways contributed 15.3% of total capital
  • High insider investment suggests they were not primarily exploiting outside investors

Great Western Railway Investment Outcomes

  • More investors lost money than gained during the period
  • Merchants and businesspeople were more likely to be gainers than losers
  • Women and inexperienced investors were more likely to be losers

Contribution and Implications

  • Challenges traditional view that Railway Mania was driven by naive investors
  • Shows railway insiders made substantial investments rather than exploiting others
  • Suggests asset price booms cannot be dismissed simply as products of investor naivety

Data Sources

  • Investor Type Analysis: Table 1 - Parliamentary Lists of Railway Subscribers 1845-1846
  • Price Movement Analysis: Figure 1 - Railway Share Price Indices 1843-1850
  • Local Investment Analysis: Original calculations from subscription lists
  • Insider Investment Analysis: Table 3 - Provisional Committee Member Investments
  • GWR Investment Outcomes: Table 7 - Great Western Railway Investor Categories