What is Tulipmania?

Tulipmania is the story of the first major financial bubble, which took place in the 17th century. Investors began to madly purchase tulips, pushing their prices to unprecedented highs. The average price of a single flower exceeded the annual income of a skilled worker and cost more than some houses at the time. Tulips sold for over 4000 florins, the currency of the Netherlands at the time. As prices drastically collapsed over the course of a week, many tulip holders instantly went bankrupt.

Key Takeaways

  • Tulip mania, a period in the 17th century when prices of tulips in the Netherlands reached astronomical highs, is considered the first financial bubble.
  • After tulips became so expensive that the cost of a single bulb exceeded that of an average home, the price collapsed, and many investors went bankrupt.
  • Tulip mania reflects the general cycle of a bubble, from the irrational biases and group mentalities that push prices of an asset to an unsustainable level, to the eventual collapse of those inflated prices.

Understanding Tulipmania

Tulipmania (also known as tulip mania) is a model for the general cycle of a financial bubble: investors lose track of rational expectations, psychological biases lead to a massive upswing in the price of an asset or sector, a positive-feedback cycle continues to inflate prices, investors realize that they are merely holding a tulip that they sold their houses for, prices collapse due to a massive sell-off and many go bankrupt.

A similar cycle was witnessed during the dotcom bubble of the early 2000s and housing bubble that preceded the global financial crisis of 2008. Some argue that the current age of cryptocurrency and its high prices might be a similar bubble.