ANNs essentially associate input patterns with output patterns. The inputs could be the raw stock market data, since this is the material that technical analysts use to predict movements in the market. The outputs could be any one of several things. For instance, given inputs representing the share prices on day 1, day 2 and day 3, the output might be a prediction of the share prices on day 4 (or possibly even on days 4 and 5). Alternatively, the outputs might be simple “buy” and “sell” signals for shares in particular companies.

The advantage of ANNs is that they are flexible. They will, if correctly trained, learn to classify any pattern in the training library correctly: if they are given a pattern on which they have been previously trained, they will produce the correct output. However, they will also produce the correct output if they are given a pattern similar to one they have seen during training. They will therefore classify patterns that they have never seen before, based on the closest matching training pattern.

Whereas conventional computer programs are written specifically and involve specific rules given by the human programmer, ANNs are trained by example. They learn to associate patterns on their inputs with corresponding patterns on their outputs. Training the neural net involves giving it a sample from the library of known input patterns and the corresponding desired output. Then the neural network is told to adapt its connections. This is repeated with other input-output pattern pairs. Typically, the set of input-output pairs used for training the net has to be presented repeatedly many times, and so neural networks can often take several hours to train. Once the neural network has been trained, you can present an input pattern to it and it will produce the corresponding output pattern.

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An ANN consists of a number of neurons simulated in a computer with connections between them. Each of these connections has a certain strength, or “weight”, indicating how strong the connection is. A connection with a large weight is efficient at passing on a signal from one neuron to another. The information and expertise that ANNs possess is coded in these strengths between neurons.

Simulated neurons can be connected in various patterns, termed “architectures”. Although complex architectures exist (for instance in Cell Assemblies, which model closely structures in the human brain), the simplest architecture, the Multi-Layer Perceptron, is probably the most common. An MLP consists of neurons in distinct layers, each of which is connected to the next layer along. Signals can pass only one way through the MLP, from the inputs of the first layer to the outputs of the last one.

Artificial Neural Networks (ANN) are simulations on a computer of groups of brain cells (neurons) configured in such a way that they perform a useful task. They are inspired by real neurons, which are simple switching elements – they gather electrochemical energy from their inputs, then either pass it on or block it. This means that individual neurons have little more intelligence than a light switch, and yet, but putting countless trillions of these cells together and setting up the correct connections between them, we get human intelligence and even (in a process that scientists haven’t even begun to understand) consciousness!

The South Sea Bubble stands in the history of finance as a salutary lesson in how people can get swept up in a financial scheme beyond all reason. It is a lesson that we would be wise to learn from today. We like to think that we are far too sensible to fall for the same sort of thing nowadays, but are we? It was less than a decade ago that we had the Dot Com Bubble, when silly amounts of money were invested in Internet-based companies with little prospect of profit. We are not so different from the investors of 1720 after all!

Sir Robert Walpole, who had spoken publically against the South Sea Company from the very beginning (in spite of being heavily involved in the South Sea Company), came out of the affair with his reputation intact and rose to prominence on the back of it. He was made Chancellor of the Exchequer and as such brought in several emergency measures to restore public confidence. As a result of his efforts, he was eventually made Great Britain’s first prime minister!

King George the First, on the other hand, became very unpopular, due to his involvement and assumed approval of the scheme. His mistresses were jeered in the streets. One possibly apocryphal tale has the Duchess of Kendal calling out to the masses from her carriage “Good people, why do you abuse us? We come for all your goods” to which some wit in the crowd replied “Yes, damn ye, and for all our chattels too!”

Parliament was recalled in December and started an investigation into the whole affair. Many ministers, including Aislabie, were expelled from Parliament, and criminal prosecutions were carried out against others. The entire board of directors was arrested and their estates were confiscated. Sir John Blunt (he had been knighted earlier in the year) escaped relatively unscathed and was allowed to live out his remaining years in relative comfort. The Post Master General committed suicide by means of poison and his son only escaped prosecution because he caught smallpox and died! In total, 462 members of the House of Commons and 112 peers were involved in the scandal.

Inevitably, the whole thing could not last forever.  In August, the share price topped £1000 and this prompted some to sell. Suddenly, everyone wanted to offload their South Sea shares and no-one wanted to buy. The price fell rapidly and went below £100 before the end of the year. Most of the investors were effectively ruined, and the knock-on effects were devastating. Banks went out business, taking all their savers’ money with them. People who had bought carriages and mansions on the basis of their supposed fortune were now bankrupted. Suicides were common. Even Sir Isaac Newton is reputed to have lost £20,000 in the crash.

The companies that launched on the back of the South Sea Company became known as “bubbles” as their share prices also rapidly inflated. They prompted the government to pass the Royal Exchange and London Assurance Corporation Act, which became known as the Bubble Act, in June. This required all joint stock companies to have a Royal Charter in order to be able to trade, effectively allowing the suppression of many of the smaller companies. The act was passed simply in order to prevent the capital that might be invested in the South Sea Company being diluted. However, the act was misguided insofar as many companies folded, with their investors losing everything. People started to realise that the rocketing share prices were based simply on consumer confidence and that external intervention could bring the whole thing to an end. Nevertheless, investment in the remaining companies proceeded apace.