How to Outsmart Isaac Newton (Really!)
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Welcome to Mind Over Money, a weekly newsletter where I share actionable ideas to help you transform your relationship with money to build financial confidence and independence.
Today's topic: Psychological biases that quietly sabotage your investment
In 1720, one of the greatest minds in history, Sir Isaac Newton, lost a fortune.
At the time, Britain was consumed by the South Sea Bubble, a speculative frenzy fueled by wild promises that the South Sea Company would dominate trade with South America. Sound familiar? It should.
We've seen this pattern repeat itself in the dot-com bubble, the housing crisis, and more recently in crypto markets.
The South Sea fever spread across every level of society. Aristocrats, merchants, even members of Parliament were pouring money in. Within a year, share prices had soared more than eightfold.
Newton was among the early investors, but unlike many of his contemporaries, he recognized the mania for what it was. He sold his shares, pocketed a 100% profit, and reportedly made an observation that remains remarkably prescient:
“I can calculate the motions of heavenly bodies, but not the madness of people.”
As the stock continued its dizzying climb and his friends grew wealthier by the day, however, Newton did something very human: he got back in. This time at double the price. When the bubble burst, he lost nearly all his gains—about £20,000, equivalent to $3 million today.
The irony cuts deep. The man who discovered the law of universal gravitation, who could predict planetary motion with mathematical precision, was ultimately undone by a different kind of force: the gravitational pull of human emotion and social pressure.
The Three Biases That Tripped Up a Genius
So what happened? Newton's downfall was not just bad luck; it was psychology at work.
Herd Mentality
We like to believe crowds are wise, but in the financial markets, they often aren’t. Herd mentality happens when we follow what everyone else is doing, assuming the collective must know something we don’t. In Newton’s time, “everyone” in Britain was getting rich on South Sea shares, which made stepping aside psychologically unbearable.
When our peers profit, standing alone feels risky. The social proof that others continue to make money created an overwhelming psychological pressure. Newton, despite his intellectual superiority in other domains, fell prey to the same social conformity pressures that affected everyone else.
The same pattern plays out in modern bubbles—from dot-coms to crypto—where people buy because others are buying, not because the investment makes sense.
FOMO (Fear of Missing Out)
After selling early, Newton watched the stock keep rising. The psychological pressure of watching others get richer while he remained "on the sidelines" (despite having already doubled his money) became overwhelming.
FOMO is a powerful emotional response rooted in loss aversion—the psychological principle that the pain of missing out tends to feel far more intense than the pleasure of equivalent gains. It hijacks our brains by framing others’ success as our loss, even when we’ve already profited.
It’s the reason investors chase trends, buy high, and panic when they’re not “in the game.” Newton’s re-entry at double the price is the classic FOMO trap: rational analysis replaced by the desperate urge not to be left behind.
Overconfidence Bias
Brilliance can be its own blind spot. After all, Newton had outsmarted the market once, so why not again?
Overconfidence makes us overestimate our knowledge and underestimate risk. It’s most dangerous after a win—when success feels like proof of skill, not luck.
Importantly, overconfidence correlates with success in other areas. A person who has excelled in business, science, or athletics frequently assumes this success will transfer seamlessly to investing, even though market success requires different skills.
Newton's overconfidence operated on multiple levels. First, after his initial 100% profit in early 1720, he likely experienced a reinforcement of confidence—he had correctly timed the market initially, which validated his judgment. Second, Newton possessed perhaps the most brilliant scientific mind of his era. This exceptional capability in understanding celestial mechanics and natural law likely bred confidence that he could decode market dynamics as well.
He believed his intellect could help him predict when the madness would end. But financial markets are not physics—there’s no formula for collective emotion. His genius in science gave him confidence, but not immunity from bias.
Five Ways to Outsmart the Biases
Behavioral biases don’t disappear with intelligence—they cede only to structure and discipline. Here are 5 ways to build both:
- Create a written plan and stick to it.
Define your goals, time horizon, and rebalancing rules before emotions hit. When it comes to investing, it's best to give every dollar a job and an expiration date. So when temptation strikes, let your plan—not the crowd—guide you.
- Invest systematically.
Use automated contributions or dollar-cost averaging to stay consistent regardless of market swings. Automation removes all human biases and the need for perfectly timing the market.
- Diversify and size positions wisely.
Don’t let any single investment—or hot trend—dominate your portfolio. Having a diverse holding limits the damage of herding and overconfidence alike.
- Add friction to impulsive decisions.
Institute a “cooling-off” period before major investment moves. Time gives emotions space to settle and room for logic to return.
- Keep a decision journal.
Write down why you invest, what you expect, and revisit results later. Journaling and reflections are the best cure for overconfidence when you reality test your investment strategy, especially in your own handwriting.
Final Thoughts
Isaac Newton's £20,000 loss during the South Sea Bubble remains one of history's most poignant reminders that exceptional intellectual capability cannot replace behavioral discipline in investing.
His three behavioral biases—herd mentality (following the crowd despite recognizing irrationality), FOMO (reinvesting at worse prices from fear of missing gains), and overconfidence (believing his intellect gave him special market insight)—created a perfect storm that devastated his portfolio.
These same biases continue to drive market bubbles, individual losses, and suboptimal financial outcomes in the 21st century. Whether through cryptocurrency manias, meme stock rallies, or real estate booms, the patterns Newton experienced repeat with remarkable consistency over time.
When even Newton couldn’t outsmart human nature, it behooves us to use structure and discipline to help us stay clear of our own hubris.