In the spring of 1720, when all of London was clamoring for shares in the South Sea compan

y, Sir Isaac Newton was asked what he thought about the market. "I can calculate the motions of the heavenly bodies, but not the madness of the market," the scientist and master of the mint is reputed to have replied.

【B1】 Newton should have considered seriously his own wise words. Having sold his ￡7,000 of stock in the company, he later bought back in at the top of the boom and went down for ￡20,000. Like all the other mug punters in every bout of speculative fever, Newton was cleaned out when the crash came.

Little has changed in the intervening 280 years.

【B2】 Common to every bubble is the deeply-rooted belief that this time it will be different, that the rise in the price of an asset is rooted in the sound common sense rather than in recklessness, stupidity and greed.

Take the crash of 1929, for example. In his excellent book charting the sad history of bubbles, John Moody, the founder of the credit agency intoned in 1927 that "no one can examine the panorama (全貌) of business and finance in America during the past half-dozen years without realizing that we are living in a new era."

The Yale economist Irving Fisher declared a few weeks before the October crash that stock prices had reached a "permanently high plateau". Why was this？ Simple. The creation of the Federal Reserve in 1913 had abolished the business cycle, while technological breakthroughs had created a "new economy" that was much more profitable than the old.

【B3】 As share prices continued their heady rise, traditional methods of stock market valuations were abandoned. It did not matter that many of the start-up companies of the late 1920s were not making any money: what counted was that some day they surely would. So share prices were justified by discounted future earnings.

【B1】