Tulip mania was a period of economic speculation in the Netherlands in the 17th century, during which contract prices for tulip bulbs reached extraordinarily high levels. It is generally considered the first recorded speculative bubble.
The most famous expose of tulip mania was written by Scottish author Charles MacKay, in Extraordinary Popular Delusions and the Madness of Crowds. MacKay called the phenomenon “Tulipomania.”
Tulips were introduced to the Netherlands from Turkey in the 1550s and quickly became popular among the Dutch upper class. The rarest and most sought-after tulips were those with “broken” patterns, which were caused by a virus. These bulbs could sell for 10 times the annual income of a skilled craftsman.
The tulip market reached its peak in 1636-37 when prices for some bulbs became so inflated that they were traded like stocks. People were buying bulbs they had never seen, and prices were rising so quickly that it was impossible to keep track of them. The bubble eventually burst in February 1637, when prices suddenly crashed. Many people lost their life savings, and the tulip market never fully recovered.
The tulip mania is often cited as a cautionary tale about the dangers of speculation and the risks of investing in assets that are not backed by real value. It is also seen as a precursor to the financial bubbles that have occurred in more recent times, such as the dot-com bubble of the late 1990s and the housing bubble of the early 2000s. Here are some of the factors that contributed to the tulip mania:
- The introduction of tulips from Turkey created a new and exciting product that was in high demand.
- The Dutch economy was booming at the time, and people had a lot of money to spend.
- The tulip market was unregulated, which allowed for speculation and price manipulation.
- There was a lack of understanding of the tulip market, which led to people making irrational decisions.
How Widespread Was Tulip Mania?
History.com provides a more subdued view of tulip mania, pointing out that many of the sources that author Charles MacKay relied upon were unreliable, such as satirical pamphlets. While people did actually invest in tulips and, in some cases, lose fortunes, it was most likely a fairly small number of investors rather than the widespread craze MacKay depicted.
Regardless of how far-reaching “tulip mania” actually was, it remains a useful example or metaphor for market bubbles that can lead to crashes. Some lessons from this include:
- Be wary of FOMO (fear of missing out) when it comes to popular items or investments.
- Consider the intrinsic value of something before investing in it. This is by no means a straightforward issue, though. All non-essential assets from the dollar to Bitcoin only have value as long as people agree that they do. However, you might reasonably ask how likely something will be valuable in a year of 5 years.
- Remember that financial markets are prone to booms and busts. Very often, when you become aware of a boom, the asset is already near its peak.