Mathematician and Transportation Historian Andrew Odlyzko has just released The collapse of the Railway Mania, the development of capital markets, and Robert Lucas Nash, a forgotten pioneer of accounting and financial analysis
Abstract: It is well known that the great Railway Mania in Britain in the 1840s had a great impact on accounting. This paper contributes a description and analysis of the events that led to the two main upheavals in accounting that took place then, and of the key role played by Robert Lucas Nash in those events. He was a pioneer in accounting and financial analysis, providing studies on the financial performance of railways that were more penetrating and systematic than those available to the public from any one else. His contemporaries credited him with precipitating a market crash that led to one of two dramatic changes in accounting practices that occurred in the late 1840s. Yet his contributions have been totally forgotten.
The collapse of the Railway Mania provides interesting perspectives on the development of capital markets. The accounting revolution was just one of the byproducts of the collision of investors’ rosy profit expectations with cold reality. Shareholders’ struggles to understand, or, more precisely, to avoid understanding, the inevitability of ruin, have many similarities to the events of recent financial crashes. The Railway Mania events thus provide cautionary notes on what even penetrating accounting and financial analysis reports can accomplish. Railway share price behavior suggests that Nash’s contributions had a much smaller effect than his contemporaries gave him credit for.
One of my favorite quotes (p.8), which is still applicable:
On another line, a shareholder complained that his company’s directors kept claiming construction costs were under control for three years, and then “the cloven hoof display[ed] itself” when it was revealed that costs were over 50% higher than projected. When sections of a line were opened for service, the standard claim that shareholders and the public heard was that “traffic had exceeded the most sanguine expectations of the directors,” and it often took years before it became clear this traffic fell far short of initial projections.
Strategic misrepresentation and optimism bias are not new phenomena.