Throughout the summer, the stock traded in a fairly narrow range, from the £800s to about £900. But when investors lost confidence, it happened quickly. On August 31, South Sea shares stood at £810. In a week, the stock could be had for £700. On September 14, the quote was £570—and the plunge accelerated from there. Company stock brought £290 on October 1—wiping out the entire gain in the stock since the deal opened—and then slid below £200 by early November.
Newton’s losses were catastrophic, likely £20,000—the equivalent of $4 million today—and by Odlyzko’s calculations, possibly much more.
For Newton, that outcome was at once a calamity and a mystery. How could such a thinker have failed so badly, when other, lesser minds had actually managed to recognize the enormous risk in the market at its peak? For example, a member of Parliament named Archibald Hutcheson had been able to run the numbers as early as March to show how South Sea stock would be dangerously overpriced at levels achieved early in the bubble. It was a clever calculation, but hardly a challenge for Newton, built as it was on concepts he had mastered decades before. Given that it was that simple, and that Hutcheson had published it for all to see, why hadn’t Newton figured it out as well, and saved his fortune?
Newton had a simple explanation for his lapse. At the crucial moment, he’d lost his mind. Or rather, others around him had lost theirs. “I can calculate the motions of the heavenly bodies,” his niece recalled him saying, “but not the madness of the people.”
That was, of course, an excuse. Who could blame him if the world was irrational? With three centuries of historical distance, though, that explanation doesn’t account for the specific timeline of Newton’s decisions during the bubble spring, each of which can be seen to make sense as it was being made. The argument for his first move, his choice in April to sell, is perfectly straightforward: He concluded that he’d made enough money and was willing to take his profit. A similarly coherent story could justify a return to the market a few weeks later. The same basic idea had already worked for hundreds, perhaps thousands, who hopped in and out more than once; every day the market rose, they could count a gain. Why shouldn’t it turn out that way for him?
It did until it didn’t. What gnawed at Newton for years, and what still seems strange, is that his capacity for dispassionate analysis failed him when he needed it most. Here was a man who had calculated logarithms to 50 places. But in the thrill of the moment, he failed to do the math.
Newton’s individual failure points to a general feature of money manias. As the economic historian Anne McCants has argued, market crises are social phenomena: The emotions that humans feel and communicate to one another mold what we can convince ourselves are objectively “rational” decisions. That was true 300 years ago in the first recognizably modern financial disaster, and it remains so today. The question is whether anything can or will be done to control for the fact that none of us can expect to outthink Isaac Newton.