TULIP-MANIA (3-4 min read)

 

 

Assuming that you saw the picture …what do you think? You must have thought…”Is this a joke?” … “Is the person insane or what!” Well, if someone does that to you today, he surely is insane or high. But if you somehow magically get transported to the early 17th century Holland, you might just consider the deal to be worthy.

Confused, right? 

Well, today I am going to tell you a story that if you look in the hindsight, might seem insane, but that’s how our mind works and you never know, it may be possible for you to do 10 irrational things in a single day without even realizing one.

It’s a different topic altogether, perhaps we will discuss the IRR-RATIONAL human mind, some other day.

As of now, let’s see what happened back in 1637-38 in Holland, which came to be known as the world’s first ever financial bubble.

Let me start at the very beginning…Tulips were introduced to Europe in early 1600s by the Ottoman Empire (Turkey). From the very beginning, tulip was fairly priced, they were rare and exotic and were seen only with the elites.

But there was one more distinct feature to them, some tulips had a flame like pattern on their petals with different colours. Now this particular feature intrigued everyone. Some botanists were studying this phenomenon (which upon discovery in 19th century, was found out to be a virus, which altered the tulips) and they were startled with the immense interest shown by people. Soon, they started charging money for the tulip bulbs. They made a good fortune out of it, and soon the word spread.

Initially, only the rich and elite class purchased the tulips, but the never-ending increase in prices, seemed like a once in a lifetime opportunity to own tulips, so, the general public went into a frenzy and within a few days, everyone was buying tulips for the sole purpose of speculation. Tulips were used for barter, people were selling their land and houses for them. Some people did not trade the flowers themselves but rather the bulbs of scarce and sought-after varieties. (just like trading the futures).

You can get an idea of the irrationality of a whole country through the fact that Semper Augustus (the most coveted tulip flower of that time) was at its peak, sold for 5500+ guilders, when the average salary of a skilled labourer was 300 guilders per annum. With 5500 guilders at that time, you could have bought a luxury home in Amsterdam, or you could have fed a good number of families for quite a few years.

Think? Just with one single flower!!

The tulip-mania suffered the same fate as most bubbles do. It got burst. 

In 1637, when the market was at its peak, a time came when the price went to such an extent that people were not able to purchase the bulbs. Suddenly, the demand vanished. Now everyone was trying to sell their tulips but no one was willing to buy.

It won’t take the brain of Albert Einstein to predict what happened next.

The basic rule of economics played, prices started falling, and they eventually plummeted. People got bankrupt. The whole economy went into a shock. The government tried to value the existing contracts but it was of little use and a lot of people took a financial hit.

Hence the bubble ended. No surprise, The Dutch then maintained distance from the flowers for quite a while. 😛

Now can you imagine the extent of irrationality of humans…!

One thing that I feel is common to all the financial bubbles is that, the irrational behavior of human beings is initially driven by super normal profits, further fuelled by greed.

I think we must pause and contemplate over our actions, never follow the bandwagon for the sake of success and always try to think rationally, at least when investing in financial markets.

We are the creators of the bubbles and only we suffer from their consequences.

This brings us to the end of the post. I hope you guys liked it, do leave your suggestions in the comments section below, we would be more than happy to read them.

Arrivederci. Adios.

{

P.S. –

Economics – People are rational.

Me- correct your facts economics… it’s been centuries. : P

}

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