8 ms·

Tulip mania: the classic story of a Dutch financial bubble is mostly wrong

184 points by okket 9y ago

hal9000xp 9y ago
A while ago I also read this article: https://www.economist.com/blogs/freeexchange/2013/10/economic-history 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.
trishmapow2 9y ago
The Wikipedia article is also good: https://en.wikipedia.org/wiki/Tulip_mania#Modern_views https://en.wikipedia.org/wiki/Tulip_mania#Modern_views
RexetBlell 9y ago
The modern day tulip mania has nothing to do with Bitcoin. This is the modern day mania: https://en.wikipedia.org/wiki/Salvator_Mundi_(Leonardo) https://en.wikipedia.org/wiki/Salvator_Mundi_(Leonardo) Someone paid almost a half a billion dollars for that painting
- nyolfen 9y ago
  i'd be more surprised if it weren't in the service of some kind of tax evasion or money laundering scheme
  - dagw 9y ago
    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
    - nasredin 9y ago
      $500,000,000 for a week of advertising for a museum? 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.
      - dagw 9y ago
        How many people a year go to the 'real' Louvre year after year just to see the Mona Lisa? I guess they're hoping for a similar long term pay off.
- charlesdm 9y ago
  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.
raverbashing 9y ago
I love when the article contradicts itself > 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
- ufo 9y ago
  The south sea bubble is an earlier example of a Democratic bubble
joosters 9y ago
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!
- kylell 9y ago
  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.
- jypepin 9y ago
  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.
  - 9y ago
fab1an 9y ago
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.
Applejinx 9y ago
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.
- raverbashing 9y ago
  Don't forget there were people remortgaging their houses to buy bitcoin, this will not end well
_pctq 9y ago
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]. [1] https://io9.gizmodo.com/5905247/the-virus-that-destroyed-the-dutch-economy https://io9.gizmodo.com/5905247/the-virus-that-destroyed-the... [2] https://en.wikipedia.org/wiki/Tulip_breaking_virus https://en.wikipedia.org/wiki/Tulip_breaking_virus
rkagerer 9y ago
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.
blunte 9y ago
Well! This explains why when I mention this fictional bubble to a Dutch friend, they seem to know nothing of it.
deleted 9y ago
[deleted]
ebbv 9y ago
So HN has devolved to the point where people are defending the actions of people in the textbook case of a speculative bubble. Yikes....
whataretensors 9y ago
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.
coldtea 9y ago
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.
- cgmg 9y ago
  Can you present an example?
  - coldtea 9y ago
    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.
forkLding 9y ago
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 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?
mcguire 9y ago
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." Does the author know how debts work?
- skookum 9y ago
  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?
  - cgmg 9y ago
    Do you have any evidence to back up your claim that the author believes “if one doesn't sell, one has incurred no loss”?
    - skookum 9y ago
      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.
      - cgmg 9y ago
        > I posited that the author was pandering to an audience with such beliefs Why did you posit that?
olivermarks 9y ago
...'Charles Mackay, whose 'Extraordinary Popular Delusions' and 'the Madness of Crowds' of 1841 have had huge and undeserved success'. Another example of books which get it all completely wrong yet become what people believe and 'how history happened'...

184 points by okket 9y ago

A while ago I also read this article: https://www.economist.com/blogs/freeexchange/2013/10/economic-history 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.

trishmapow2 9y ago

The Wikipedia article is also good: https://en.wikipedia.org/wiki/Tulip_mania#Modern_views https://en.wikipedia.org/wiki/Tulip_mania#Modern_views

RexetBlell 9y ago

The modern day tulip mania has nothing to do with Bitcoin. This is the modern day mania: https://en.wikipedia.org/wiki/Salvator_Mundi_(Leonardo) https://en.wikipedia.org/wiki/Salvator_Mundi_(Leonardo) Someone paid almost a half a billion dollars for that painting

nyolfen 9y ago
i'd be more surprised if it weren't in the service of some kind of tax evasion or money laundering scheme
- dagw 9y ago
  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
  - nasredin 9y ago
    $500,000,000 for a week of advertising for a museum? 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.
    - dagw 9y ago
      How many people a year go to the 'real' Louvre year after year just to see the Mona Lisa? I guess they're hoping for a similar long term pay off.
charlesdm 9y ago
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.

raverbashing 9y ago

I love when the article contradicts itself > 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

ufo 9y ago
The south sea bubble is an earlier example of a Democratic bubble

joosters 9y ago

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!

kylell 9y ago
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.
jypepin 9y ago
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.
- 9y ago

fab1an 9y ago

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.

Applejinx 9y ago

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.

raverbashing 9y ago
Don't forget there were people remortgaging their houses to buy bitcoin, this will not end well

_pctq 9y ago

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]. [1] https://io9.gizmodo.com/5905247/the-virus-that-destroyed-the-dutch-economy https://io9.gizmodo.com/5905247/the-virus-that-destroyed-the... [2] https://en.wikipedia.org/wiki/Tulip_breaking_virus https://en.wikipedia.org/wiki/Tulip_breaking_virus

rkagerer 9y ago

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.

blunte 9y ago

Well! This explains why when I mention this fictional bubble to a Dutch friend, they seem to know nothing of it.

deleted 9y ago

[deleted]

ebbv 9y ago

So HN has devolved to the point where people are defending the actions of people in the textbook case of a speculative bubble. Yikes....

whataretensors 9y ago

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.

coldtea 9y ago

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.

cgmg 9y ago
Can you present an example?
- coldtea 9y ago
  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.

forkLding 9y ago

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 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?

mcguire 9y ago

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." Does the author know how debts work?

skookum 9y ago
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?
- cgmg 9y ago
  Do you have any evidence to back up your claim that the author believes “if one doesn't sell, one has incurred no loss”?
  - skookum 9y ago
    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.
    - cgmg 9y ago
      > I posited that the author was pandering to an audience with such beliefs Why did you posit that?

olivermarks 9y ago

...'Charles Mackay, whose 'Extraordinary Popular Delusions' and 'the Madness of Crowds' of 1841 have had huge and undeserved success'. Another example of books which get it all completely wrong yet become what people believe and 'how history happened'...