> 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.
It was (essential) bought by the Abu Dhabi Tourism board to be displayed at the Louvre Abu Dhabi. Basically they bought it as an expensive advertising campaign for their big shiny new museum
It's a sign of asset price increases across the board. The value of money hasn't changed THAT much (yet) with all the central banks money printing, but inequality has.
Asset prices -- whatever the asset class, have boomed through the roof. Money, aside from for consumption, just isn't worth a lot anymore.
> 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
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.
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!
I guess if there is a 50% or more chance that someone will pay more and you would make money then it makes sense, you can't win if you don't risk, those who stay on the side find comfort in calling those who risk, lucky when they win and stupid when they lose.
most of the interesting point is that it seems like tulip were more part of the realm of art then commodities.
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.
Nope, they were trading tulip bulbs. You have to store those bulbs in good condition so the flower could bloom. Bulbs are not something you can show off with. Once it blooms it is over you cannot show it off like art. So paying price of a house for something you cannot really show off, will spoil quickly, and you could probably sell to next fool for higher price is pure greedy speculation.
Once it’s done blooming, you can extract the bulb and store it until next year, it works quite well. In dry enough soil, you might even get away with leaving it in the ground.
Once is blooming your expensive Picasso is now two or four expensive Picassos, and in the next year you'll have maybe 20 picasso or so. And as everybody wants to have it in their houses you could easily sold 10 and keep the other.
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.
You are putting the emphasis on 'speculative' rather then 'bubble'. All speculative markets go through bubble-like phases, and your success in speculating in a market depends quite a bit on your ability to understand what is driving prices in that particular market during the times you are active in them, and in understanding when, and to what extent, they are bubbling. If one thinks tulips are just like art is just like bitcoin is just like cattle futures, you may not be well-enough informed to speculate successfully in any of those markets.
> If one thinks tulips are just like art is just like bitcoin is just like cattle futures, you may not be well-enough informed to speculate successfully in any of those markets.
It looks to me like the parent poster is just trying to explain the facts on the ground, not give investing advice.
> 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.
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].
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.
Actually, particular cryptocurrency supply is truly limited, unlike gold, which is extremely abundant in our universe.
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...
Ultimately miners aren’t in charge. If miners try to change the rules, but the majority of users ignore them, the miners’ fork will be close to worthless.
If the miners are financially motivated and rational they wouldn’t refuse to mine the most valuable fork. They have a large investment in hardware and would lose a lot of money.
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.
Likewise one could make the argument it is dimensionally incorrect to compare abundance of a particular cryptocurrency (bitcoin) with all the different element in the periodic table.
If you are thinking of investing heavily (relative to what you can afford to lose) in any speculative activity, it is not rational to limit your analysis to that most basic economic truism.
Which is mainly also overblown [1] and one of the first world wide, anti-imperialist campaigns in modern history. And wildly successful if I might say.
> 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.
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.
>>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.
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.
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.
What is often overlooked and misunderstood is that the bulbs were not only valued for their beauty, but more importantly for their use as commercial breeding stock.
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
Just because something is limited in supply and capable of reproducing doesn't mean it inherently has value in the context of the greater economy. I don't think this "debunks" the irrationality of tulips. When the price crashed, they weren't left with a tulip they could continue to breed and make a living with, they were left with a worthless tulip.
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.
Yes, but the discounted present value of that tulip's reproductive capacity into the future is much more justifiable to value so highly. It turned out not to be a good investment, but that doesn't make it irrational. Had a moderately good tulip market persisted, it may have justified paying such a high price for uniquely high quality bulbs, because you could turn them into a productive asset by breeding them.
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 :)
The author seems to go through great lengths to call a phenomenon where people bought something to sell it for a higher price followed by a sudden collapse in said price, something other than a bubble.
If the Tulip mania was in fact "a Dutch financial bubble" then it seems to me the story is mostly right. Apparently some aspects like the government stepping in or the Dutch economy suffering may have been embellished a bit, but I've only ever heard those parts from people who claim the story has been embellished.
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.
This is one of the classical two-layered 'did you know' /'podcast' memes.
The first layer is about a well known, but not necessarily universally known historical event/idea that's been a interesting tidbit of knowledge for decades, usually well suited for metaphors of all kinds ("Bitcoins are like Tulip Mania 2.0). The second layer always asserts the opposite of that meme, or rather the did you know this isn't actually true position.
The likely Truth is ultimately a somewhat boring synthesis of both positions, that may make for a good, but not a great smarty pants podcast topic. I love those.
True and relevant, even if they'd like to say it's not.
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.
Additionally, it was not just any tulip that was traded so high, it was a specific strain that was considered especially beautiful and that people did not succeed in systematically reproduce. There was a good reason for that: the beauty was not caused by genes, but by a virus [1][2].
Thank you for this. Regardless of one's take on it, it's nice to see someone propagating well-researched background information instead of blindly repeating rhetoric.
Tulipmania is obvious FUD. The comparison makes no sense. It's about the quirks of inefficient market with low volume low supply where each item has unique properties. Can't think of a currency like that. Maybe cryptokitties, but that only fulfills the unique properties aspect.
TL;DR; Found some irrelevant differences between the exaggerated version and the actual history, and I'm going to pretend that everybody believes the ultra-exaggerated version and that they matter.
Like how prices weren't that high as people think, and then citing 37 documented examples of people that than paid what amounts to the yearly wage of a master craftsman for some bulbs (and those are just those that they could find documented) -- as if those are not crazy prices still.
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.
Interestingly most modern investing websites use the over-exaggerated "fake news/clickbait" version of the Tulip mania if it is over-exaggerated, even investopedia uses it as the first example of a bubble: https://www.investopedia.com/terms/b/bubble.asp
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 get that the tulip thing it's over-blown, but...
"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."
Even a small amount of time spent perusing Bitcoin fora reveals an endemic belief that if one doesn't sell, one has incurred no loss. Any conversations discussing a realized loss will quickly surface the "weak hands" meme wherein the loser simply didn't have sufficient will or presence of mind to keep HODLing and selling their Bitcoins served to benefit the better investors who were able to buy them at a discount.
Perhaps the author is simply playing to the zeitgeist?
I made no such claim about the author's beliefs. I posited that the author was pandering to an audience with such beliefs, an audience who loves these "tulip mania didn't happen" stories because in their logic they somehow serve as rebuttal to the possibility that crypto-currencies are experiencing a speculative mania of their own.
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[ 4.3 ms ] story [ 108 ms ] threadhttps://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.
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.
> 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
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.
[1] https://en.m.wikipedia.org/wiki/Black_Legend
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.
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.
[1] https://io9.gizmodo.com/5905247/the-virus-that-destroyed-the...
[2] https://en.wikipedia.org/wiki/Tulip_breaking_virus
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.
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?
"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?
Another example of books which get it all completely wrong yet become what people believe and 'how history happened'...