Lesson # 23 :Tulipomania and What We Should Learn From It

Tulipomania or the Tulip Bubble refers to the exponential growth in the price of tulips and its subsequent fall. It took place in the Netherlands in the late 1630's  and was one of the world's first recorded instances of an economic bubble. At the bubble's peak, the price of an ordinary tulip bubble was so astronomical that a nice Dutch villa by the river cost as much as a single tulip bubble.  
Tulips have no uses except their aesthetic value (unlike other commodities like gold or silver or even diamonds, all of which have other uses). So why did such a trivial flower cost ten times as much as a skilled craftsman's yearly wages?


One obvious reason that many economists cite was the novelty of a certain kind of tulip, which increased the demand for tulips several folds (Similar, in my opinion, to the novelty of Tech IPOs during the Dot-Com in 1999). Novelty of a good and the promises of unlimited potential always cause mass hysteria and demand for the product. Another reason was the scarce supply of the tulip bubble in the Netherlands at that point of time (People had started hoarding tulip bubbles). Yet another reason was that the tulip had become a highly coveted luxury good and a status symbol, an indicator of wealth and power.

When there was finally a correction in the price of the tulip flower, the Dutch economy was in shock. People were left with useless tulip bulbs that were suddenly worthless. The Tulip Bubble was first chronicled in Chrles Mackay's book  Extraordinary Popular Delusions and the Madness of Crowds. In Mackay's account, panicked tulip speculators sought help from the government. The government declared that  that anyone who had bought contracts to purchase bulbs in the future could void their contract by payment of a 10% sum. 

The most important lesson to learn here is that buying anything due to mass hysteria and speculation is wrong. Oftentimes, the price of already overvalued things skyrockets due to consumer hype and then crashes suddenly, leaving invstors empty pocketed. A lot of research and thought should be put into an investment, and one should not follow the crowds blindly.

Happy Investing (Hopefully not in tulips)

Madhav Behl (On Behalf of The Doodle Corporation).