Tulip mania: the classic story of a Dutch financial bubble is mostly wrong
theconversation.com
theconversation.com
[1] https://io9.gizmodo.com/5905247/the-virus-that-destroyed-the...
"When the crash came, it was not because of naive and uninformed people entering the market, but probably through fears of oversupply and the unsustainability of the great price rise in the first five weeks of 1637."
So, what happened in January, 1637?
"So those who lost money in the February crash did so only notionally: they might not get paid later. Anyone who had both bought and sold a tulip on paper since the summer of 1636 had lost nothing. Only those waiting for payment were in trouble, and they were people able to bear the loss."
Does the author know how debts work?
Perhaps the author is simply playing to the zeitgeist?
Why did you posit that?
https://www.economist.com/blogs/freeexchange/2013/10/economi...
> Earl Thompson, formerly of UCLA, takes a different approach. He reckons that the market for tulips was an efficient response to changing financial regulation—in particular, the anticipated government conversion of futures contracts into options contracts. This ruse was dreamt up by government officials, who themselves were keen to make a quick buck from the tulip trade.
> In plain English, investors who had bought the right to buy tulips in the future were no longer obliged to buy them. If the market price was not high enough for investors’ liking, they could pay a small fine and cancel the contract. The balance between risk and reward in the tulip market was skewed massively in investors’ favour.
> Thompson argued that popular interpretations of tulipmania have failed to distinguish between options and futures. Tulipmania was only a contractual artifact. There was no “mania” at all.
> But it wasn’t irrational to pay a high price for something that was generally considered valuable, and for which the next person might pay even more.
Yes it was. It wasn't "irrational", as buying an expensive luxury bag isn't.
What's irrational is the buying - flipping - selling that made the price rise.
> When the crash came, it was not because of naive and uninformed people entering the market, but probably through fears of oversupply and the unsustainability of the great price rise in the first five weeks of 1637.
This is an interesting aspect, it was a bubble but the entry barrier made it involve fewer people. I guess the first "democratic" bubble was the one that lead to the 1929 crash
The tulip thing is just what happens, in myriad forms, when the Gini coefficient gets too out of hand. It's not that lots of people were ruined through gambling desperately on bizarre, random things. It's that there were a bunch of people so insensibly wealthy that they didn't need to be even slightly rational.
Also see 'Veblen good'. When conditions allow this, rationality just stops mattering.
What? That's no way to 'disprove' a bubble. Of course the people buying stuff thought it was valuable, or that there would be a greater fool to sell it to. That doesn't mean they were right.
Although it’s true that the most expensive tulips of all cost around 5,000 guilders (the price of a well-appointed house)...
How is that not irrational? Come on.
I was able to identify only 37 people who spent more than 300 guilders on bulbs
Is this evidence of absence, or absence of evidence?
Anyone who had both bought and sold a tulip on paper since the summer of 1636 had lost nothing.
Well, yes. It's the bagholders that lose out in a bubble. If you manage to buy and sell something that's overpriced, then you'll be ok. But someone will be left holding it.
In any case, the south sea bubble is a far far better fit for bitcoin and crypto coin mania. They even had comparable ICO sales!
People were buying tulips because it was a sign of wealth and taste and a beautiful rare object to display, just like art. People were speculating on those, just like art. But when people do so with Art and pay millions, nobody bats an eye.
Bitcoin (and other commodities) might have another underlying reason for why people give them value and decide to speculate on them (just like, say, Wall Street speculating on cattle futures).
So yeah, maybe some Tulips were sold the price of houses - but it sounds normal when someone spends millions on a painting.
I'm defending any point, just saying I think it's interesting to read this, I never heard before that people were mostly buying tulips because of their symbols, not just for pure speculation.
In the tulipmania some people lost money. The few buyers that knew their stuff, with the expertise to know how to multiply, take good care of them and keep it clean of diseases just get rich. If the unique and rare tulip weren't diseased their owner would became extremely rich and famous. Buying it was the logic choice. The same clone of turkish bulb has been sold each year for entire generations of the same european families. Thousands of years after, is still sought for buyers.
It looks to me like the parent poster is just trying to explain the facts on the ground, not give investing advice.
There have actually been a lot of articles about various art bubbles. Here's one from 2016 about a possible contemporary American art bubble[1]; here's one from 2012 about a Chinese art bubble[2].
[1] https://www.theguardian.com/artanddesign/2016/jan/17/art-mar...
[2] http://www.businessinsider.com/the-chinese-art-bubble-is-pop...
It's not irrational in the most basic economic sense - supply and demand determines the price.
Why is gold so expensive? Around 90% of it is being hoarded, not used industrially. People think it's valuable, the supply is limited, therefore it is valuable. Same with cryptocurrencies. Actually, particular cryptocurrency supply is truly limited, unlike gold, which is extremely abundant in our universe.
The only weird thing about the tulipmania is that tulips can be (relatively) easily grown.
Depends what you mean by a 'particular' cryptocurrency. There's certainly been no sign of a limit on bitcoin, what with all its forks. And there's no end of alternative copycat coins filling the list at coinmarketcap.com. You have to take a leap of faith to trust that miners won't change the system once all the 'limited' 21 million original bitcoins have been produced...
Gah, that's a pretty bad typo.
If for some reason they did refuse, or worse, attacked the network (with double spends or censorsing transactions) then the users could emergency fork to change the proof of work and attract new miners.
The miners can't change bitcoin, unless the community agrees with them. They can only really join or leave with their hashing power.
I don't think bitcoin will even exist by the time it's scheduled to be mined completely (100+ years).
It is dimensionally incorrect to compare abundance of (a particular) cryptocurrency with gold.
Satoshis are still more rare.
https://answers.yahoo.com/question/index?qid=20090614042422A...
If everyone around you believes something fundamentally irrational, it can be situationally rational to appear to have the same belief system.
But that only proves thst rational people are adaptable, not that the belief system itself makes sense, or that it doesn’t create terrible outcomes.
I'd say it's quite different. Governments that hold gold often do it because they expect gold to keep its value, not because they are expecting the value to increase massively (I can't think of any government leaders advocating that their country buy a lot more gold to get rich quickly). People who hold cryptocurrencies, on the other hand, seem to say that enormous fluctuations in value (including massive decreases in value) are acceptable because eventually the value might skyrocket. The reason people hold gold and the reason most people hold cryptocurrencies seem to be the opposite of one another.
>How is that not irrational? Come on.
Rolex, Vertu, Louis Vuitton, Patek Philippe, Coach, Armani. All of these are luxury brands. Their products range from very expensive to more than the average person will earn in a lifetime, never mind the price of a well appointed house, all for goods which are at best five times as mass market equivalents that cost less than 1% of their price.
And they're worth it to t least some of their buyers either because they believe the difference in quality is worth it or because they understand signalling.
https://en.wikipedia.org/wiki/Signalling_%28economics%29
You may have heard that Elon Musk recently launched a sportcar into space. The Netherlands had rich people who could afford to spend money on things they enjoyed too.
There's no accounting for taste.
https://en.wikipedia.org/wiki/De_gustibus_non_est_disputandu...
Since it was not possible to reproduce the best bulbs through seed propagation, the already rare buds themselves were the only source of producing future varieties exhibiting the same beautiful patterns. This goes a great way to explaining the high prices paid, and debunking the myth of irrationality.
"The tulip market involved only bulbs affected by a mosaic virus which had the effect of creating beautiful, feathered patterns in the flowers. Only diseased bulbs were valued by traders, because a particular pattern could not be reproduced through seed propagation. Only through budding of the mother bulb would a pattern breed true." - Garber, Famous First Bubbles https://www.aeaweb.org/articles?id=10.1257/jep.4.2.35
I'll admit irrationality is hard to define. One could argue the entire art in industry is irrational, but given how low it's been around, it's safe to assume it ties into some fundamental irrationality in us that in turn makes it rational.
This kind of statement always interests me in an socio-economic sense. What is rational? What it often comes down to is a personal "my choice is the rational one, and everyone else is irrational". Take an iPhone for example. There are much cheaper phones out there, so is everyone buying an iPhone irrational? And then it only follows, is everyone who buys Apple stock irrational?
Additionally, bubble is a term I find thrown around too easily. It seems any time an asset price is high, people immediately think bubble. A high asset price is not enough. The price must be far beyond some underlying value. The rub is determining value. Is BTC in a bubble? The price is high, and has been very volatile, but what is the value? With my laymen knowledge of BTC, I think the value is certainly > 0$, but is it < 10k? I don't know.
Thinking about this reminds me of the housing bubble. In Vegas house prices made no sense because there is literally land as far as you can see in every direction. Where I live now, there were also clear disconnects from value and price (crappy apartments turned into crappy condos), but not every piece of expensive property was selling way beyond its value. There are properties along the water or on the beach that really are in short supply. Those barely moved down when the housing bubble popped.
Defining 'value' is also a fun conversation, but I've rambled on too long :)
this counts as many many homes, and no one seems to flinch.
we don't know who bought 5,000 guilder tulip, but we can assume that he could afford it.
_Is this evidence of absence, or absence of evidence?_
author spent a long time in archives studying this particular subject. this is evidence of absence.
in any case, even at inflated prices, buyers were getting something they could touch. what buyers of $1,450 Amazon share are getting - is totally unclear. no voting rights, no dividends, nothing. one helluva value.
Another example of books which get it all completely wrong yet become what people believe and 'how history happened'...
The author of the article is seemingly implying that it is rather another form of conspicuous consumption? Such as with fancy clothes or Air Jordans?
I think the only thing they are advertising is they have a lot of money.
I'm guessing targeting other people with a lot of money.
Asset prices -- whatever the asset class, have boomed through the roof. Money, aside from for consumption, just isn't worth a lot anymore.
Or how the author says that bulbs were exchanged in neighborhoods and taverns and such, to brush off the craze as "small scale", and then goes on to say how specialized exchanges emerged in most cities, with experts in such trade etc -- without seeing the contradiction.