Stock Market Bubbles – The Tulip Mania Revised

Most people who’ve done any reading on investing have come across the Dutch Tulip Bulb Mania of the 1630s. It often is considered to be the first financial bubble and the classic example of manias, financial delusions, and other mental mistakes. This article says that everything we’ve been told about the tulip mania is wrong. There definitely was a rapid rise in tulip bulb prices over several years, and prices did decline quickly. But many of the reasons cited for the price rise and decline are false, according to the author.

Why have these myths persisted? We can blame a few authors and the fact they were bestsellers. In 1637, after the crash, the Dutch tradition of satirical songs kicked in, and pamphlets were sold making fun of traders. These were picked up by writers later in the 17th century, and then by a late 18th-century German writer of a history of inventions, which had huge success and was translated into English. This book was in turn plundered by Charles Mackay, whose Extraordinary Popular Delusions and the Madness of Crowds of 1841 has had huge and undeserved success. Much of what Mackay says about tulip mania comes straight from the satirical songs of 1637 – and it is repeated endlessly on financial websites, in blogs, on Twitter, and in popular finance books like A Random Walk down Wall Street. But what we are hearing are the fears of 17th-century people about a 17th-century situation.