Can we learn from those stock market bubbles?

WHAT is it that causes stock market bubbles? What causes these bubbles to burst? What can we learn from the history of market behaviour that could make us successful investors? Or have we put too much trust in the "efficient markets" approach, with its assumption that investors respond rationally to financial news and developments?

What we would not give to know the answers to these questions. We never will, of course. But every investor feels that he or she can outwit and outinvest the fool next door. Sadly, the history of markets tends to suggest that not just the fool next door, but entire towns and countries can be caught in the grip of long periods of madness and delusion when it comes to investment.

Congratulations, therefore, to the Stewart Ivory Foundation. It is funding a new course for the Edinburgh Business School at Heriot-Watt, provisionally entitled A Practical History of Financial Markets.

After the events of the past two years, Russell Napier, project consultant for the Stewart Ivory Foundation, may well need a bouncer’s outfit to help keep an orderly queue at the doors. And any publication spin-off would stand a good chance of being a business best-seller.

Course authors and teachers already lined up are unlikely to disappoint in the apocalypse stakes: they include Andrew Smithers (who has written at length on the financial collapse of Japan); Gordon Pepper MBE (the gilt market guru who wielded huge influence when at Greenwell); Joachim Goldberg and Herman Brodie (Cognitrend); Peter Warburton (formerly of Flemings) and Barry Riley (formerly of the Financial Times).

The events of the past two years, says Napier, suggest that the accumulation of knowledge in the sciences may be cumulative "but in finance it remains cyclical".

Despite the explosion in financial analysis over the past 40 years and the emergence and development of portfolio theory, stock market manias and crashes seem to be as evident as ever. Even more odd is that there is no course available globally that can offer students and investment managers the opportunity to study and understand stock market history.

Now, thanks to the foundation, there is. One criticism of the line-up might be that the course has drawn to itself those who could be accused of being permanent bears. The list does rather veer on the side of the spectacular pessimists. After reading Smithers, Brodie and Warburton, there are few who would dare risk putting pennies in a jar, let along investing in the stock market. But again, this may well be a reflection of the point in the stock market cycle we are at: a few rungs up from despair.

What this course has the potential to do is to open up for examination the rational behaviour assumptions behind portfolio theory and the efficient markets schools. We know, ever since the publication of Popular Delusions and The Madness of Crowds that emotions rule markets and that psychological factors play an enormous part in financial volatility. Talk of "fundamentals" can be no more than a cloak over more basic drives.

But that arguably makes this course, likely to be introduced next year, all the more of a success. It should also help put Edinburgh and Scotland on the global map as a centre for financial market analysis and research, even though it may deconstruct the work of Scots actuarial thinkers.

It is one of the first projects to be funded by the Stewart Ivory Foundation, set up two years ago to support the development of financial education in Scotland. Now the foundation is keen to back other bright ideas. It has 1.5 million for suitable projects and is eager to hear of similar ideas and projects to support. As it has given itself just seven years to disburse the funds, it finds itself in an unusual position for an Edinburgh fund management house of having money to invest and a deadline to invest it by. Applicants should waste no time.

Contacts: The Stewart Ivory Foundation, c/o First State Investments, 23 St. Andrew Square, Edinburgh EH2 1BB.

The website address is: www.thestewartivoryfoundation.com.