The Economic Logician picked up some of my recent research last week, and since I’ve been in the midst of trying to revise that paper and get it out, I figured it wasn’t a bad time to highlight it here myself.
Ann Carlos and Larry Neal, my coauthors, engaged in an extensive data collection project whereby they digitized the ledger and transfer books of some of the earliest English joint-stock companies and their share prices in the early 1700s. Picture hours upon endless hours in historical archives in London. You can imagine that for a data geek like myself, this was just too much fun to pass up, so with them, I have been exploring ways to combine these data and look at portfolio holdings of individuals over the period of the South Sea Bubble. We find two big things. First is that investors didn’t diversify. Despite transparent pricing and an active secondary share market, most investors we see both during the 1720s and three decades earlier owned stock in only one company. This isn’t to say that they weren’t diversifying in other ways. We don’t have full portfolio information for most, so we don’t know if they held land or bonds, for instance. We do know that within the set of financial instruments for which we have information, they didn’t diversity.
We explore a few reasons for this. Carruthers (which is a very good read) suggests that individuals traded their shares on a personal basis, mostly to business partners, family, or friends, as a way of ensuring that the stock stayed in the hands of individuals of a particular political persuasion. Stock market activity in this period does not support this hypothesis, with a large number of jobbers or brokers taking on the sale and purchase of stock and the rise of meeting places like the coffee shops in Exchange Alley where daily prices were posted.
We do not exactly, as Economic Logician suggests, show that individuals weren’t financially literate. Rather, we suggest that individuals didn’t diversity partially due to the voting rules of the companies. There was likely room for diversification to reduce idiosyncratic risk associated with holding in only one company, and many individuals had the requisite capital to purchase a portfolio of shares. However, the gains to purchasing in only one company were large for merchants who could use their vote or position on the governing boards to score lucrative contracts or help friends. We believe that the voting rules were a primary factor in the lack of diversification, at least where a wealth constraint didn’t bind.
Related: Carl Wennerlind released a very good book on this period explaining the rise of credit markets and their link to power, war, slavery, the pamphleteers, and more. Worth a read as well if you find this stuff interesting.