What Bitcoin Investors Can Learn from Issac Newton’s Mistake

Posted in: Archive
June 18, 2017 4:01 PM UTC

Panos Mourdoukoutas, Professor and Chair of the Department of Economics at LIU Post in New York who is also a contributor to several professional journals and magazines, such as Forbes and The New York Times, recently published a write-up stating that bitcoin will make many more people millionaires before it’s fall. Now, the economics professor advises bitcoin investors not to commit the same mistake as Isaac Newton did back in the 1720s when he bought shares early on in the South Sea Company.

Sir Isaac Newton made a great fortune by investing in the South Sea Company, however, he was too greedy and lost more than three times the profits he made in the first round. According to Mourdouskoutas, the physicist’s mistake was related to his emotions: he failed to resist a common temptation during bubble markets. He got back to a bubble asset at a higher price and stayed with it as the circumstances of the market changed watching as the bubble exploded.

“Back in 1720, Sir Isaac Newton owned shares in the South Sea Company, the hottest stock in England. Sensing the market was getting out of hand, the great physicist muttered that he ‘could calculate the motions of heavenly bodies, but not the madness of the people.’ Newton dumped his South Sea Company shares, pocketing a 100% profit totaling 7,000 pounds,” Jason Zweig wrote in the commentary for the revised edition of Benjamin Graham’s The Intelligent Investor.

Although, months later, Newton couldn’t control his greed and enthusiasm, invested again into the South Sea Company’s stocks at a much higher price. That investment resulted in the physicist losing 20,000 pounds (which is more than $3 million in today’s money). Newton was so ashamed of this investment that he forbade anyone to speak the words “South Sea Company” in his presence.

Mourdouskoutas thinks, based on the findings of various financial experts, that this behavior is related to mental accounting. Mental accounting, unlike traditional accounting, causes individuals to treat gains in financial markets, lottery winnings, casino income, and other bets differently from funds earned from labor, interest income or other sources. The economics professor used the book Nudge as a reference for this behavior:

“You can see mental accounting in a casino. Watch a gambler who is lucky enough to win some money early in the evening. You might see him take the money he has won and put it in one pocket, and put the money he brought with him to gamble that evening (yet another mental account) into a different pocket. Gamblers even have a term for this. The money that recently has been won is called ‘house money’ because in gambling parlance the casino is referred to as the house. Betting some of the money that you have just won is referred to as ‘gambling with the house’s money’ — as if it were somehow different from some other kind of money. Experimental evidence suggests that people are more willing to gamble with money they consider house money—like buying into an inflated asset,” Richard H. Thaler and Cass R. Sunstein explains in the book.

According to Mourdouskoutas, committing the same mistake as Newton has nothing to do with intelligence but with emotions, such as greed, which often makes investors lose hard amounts of money.

Featured image from Shutterstock.

Last modified: May 21, 2020 9:45 AM UTC

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Benjamin Vitáris

Ben is a crypto journalist and copywriter who has a great passion for blockchain technology. He believes that decentralization empowers people to take charge of their lives, and gives back what we desired for a long time: financial freedom. Follow him on Twitter @BenjaminVitaris or email him directly at dzsuvalance(at)gmail.com. Benjamin is crafting crypto content from his home office in Budapest, Hungary.