As human beings we have a deep-seated desire to explain natural and social phenomena. We have an in-built search mechanism which looks for causation in order to explain the world around us. For example, the US stock market declined on the day after Obama's election. Why? Most people connected the two events, but the two may have been totally unrelated. Another example can be found in today's Metro where it is claimed that crime falls and birth rates go up in Mexico City whenever Javier Hernandez is playing for Manchester United. These may simply be crude correlations and there may be no causation whatsoever. It requires rigorous statistical testing to demonstrate correlation never mind causation!
My colleague and former PhD student Gareth Campbell has created a website about the British Railway Mania - click here . This episode has been described by the Economist as probably the greatest bubble in human history. Gareth's website provides background on the Mania and posits some explanations for the 'bubble'. In his explanation of why the bubble happened, Gareth places a lot of emphasis on investor myopia regarding future dividends and uncalled capital. His study of investors during the episode does not support the view that this episode was fuelled by naive and irrational investors.
