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Myopic Rationality in a Mania

Author: Gareth Campbell

Published in Explorations in Economic History (2012) vol. 49, pp. 75–91

Abstract: The rationality of investors during asset price bubbles has been the subject of considerable  debate. An analysis of the British Railway Mania, which occurred in the 1840s, suggests that investors may have been myopic, as their expectations were only accurate in the short-term, but they remained rational, as they acted in a utility maximising manner given their expectations. Investors successfully incorporated forecasts of short-term dividend changes into their valuations, but were unable to predict longer-term changes. When short-term growth is controlled for, it appears that the railways were priced consistently with the non-railways throughout the entire episode.

Download Journal Article: 

http://www.sciencedirect.com/science/article/pii/S0014498311000441

Download Working Paper: 

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2545198

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