Tulips first arrived in Western Europe in the late 1500s and became a fashionable status symbol for wealthy Dutch merchants. Certain bulbs were found to grow with unpredictable “broken” colors, which were highly prized due to their rarity.
As cultivation techniques improved, more people began collecting and speculating on tulip bulbs. Eventually, even stock traders joined the game, pushing the average price of a single flower to the point where it exceeded the annual income of a skilled worker and cost more than some houses at the time. Eventually, prices peaked, and then drastically collapsed over the course of a week, causing many tulip hoarders to lose their fortunes.
Tulipmania (also known as the Dutch tulip bulb market bubble) 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 holding an irrationally priced asset.
- Prices collapse due to a massive sell-off, and an overwhelming majority go bankrupt.