Tulip Mania

Dobromir Risov April 2025

Intro

In today´s blog I talk about the tulip mania. The tulip mania took place during the Dutch Golden Age. The Dutch Golden Age span from 1588 until 1672. During the tulip mania people were willing to trade a luxurious home in Amsterdam for certain single tulip bulbs. Biologically, tulips are flowers blossoming in spring. They come in different colours and variations. Tulips mainly serve as décor.  In rare instances where  people faced starvation, the bulbs of tulips served as food.

Main

More than half of the world´s tulip production is grown in the Netherlands. From there they are shipped worldwide according to the Amsterdam Tulip Museum website. Tulips originate from Central Asia, in Kazakhstan.  They were first mentioned in the 16th century. From Kazakhstan, ambassadors brought them via Austria to the Netherlands. A tulip is also the brand sign of Turkish Airways.

According to Merriam-Webster “mania” describes a mental hyperactivity or excessive enthusiasm. The “early” stage of the tulip mania was around the 1620s, some thirty years into the Dutch Golden Age. During the first stage people became excited about the looks of diseased plants as shown below: a diseased plant is one with more than one colour.

3 Stages

During the first stage, solely academics & collectors were interested in tulips. Their interest was for research & hobby.  The first stage lasts until around 1636. From there excitement turned into passion. During the second stage other groups of the population became interested in tulips. Tulip bulbs became high demand. This stage lasted until early 1637, about a year in total. The third stage marks the collapse in demand.

Let´s take a look at the graph below: it covers the years from 1634 - 1637. On the left axis you see the price per half of gram tulip bulbs in guilders, the Dutch currency back then. During 1634-35, the price was at 2,5 guilders. Up to mid 1636, the price reaches 5 guilders. Then the price skyrockets to more than 55 guilders. There´s actually not enough space in the graph to display the hike. That´s an increase by a factor of more than 10 times!

Pre 1637 price levels might seem “normal” relative to the astronomic 1637 levels, but they weren´t. You see that when you compare tulips to gold. The price for half a gram of gold was at that time around 0.35 guilders. The same quantity of bulbs sold in 1634 for 7 times the price of gold (0.35 guilders * 7 = 2.45 guilders). Gold was a precious metal back then as it is today. When you look at this graph it is good to ask yourself the question - what fundamental caused the meteoric rise? If the answer is not based in fundamentals it is probably good to stay away. That is something you can apply with every investment.

Another example for the maniac prices during the second stage: some buyers were offering 12,000 guilders in exchange for 10 bulbs. At that time a smart town house would cost 12,000 guilders.  Bulbs of tulips had transformed their role from a decorative flower to a currency (Currencies - part 1): people were able to buy houses & other goods by using tulips as a means of exchange. Robert Taylor writes about the Tulip mania:

"The market dynamics were characterised by a classic case of “irrational exuberance,”

with buyers purchasing bulbs not for their intrinsic value,

but solely based on the expectation that prices would continue to rise indefinitely. (...)

This phenomenon is a prime example of herd mentality."

While doing some research on the website multpl.com for a new blog, I found out there is a book called "Irrational Exuberance" written by Robert J. Shiller, an economist from Yale University. He developed also a couple of indices - to assist investors with decision making. The good thing being, private investors having the opportunity to put daily news into a longer term perspective. The tulip mania is not the sole bubble in the history of finance and investment. I read about the Mississippi bubble while doing research for this blog. In the more recent past, I remember the dotcom bubble in the late 90s and early 00s.

Summary

Do you see yourself trading your apartment for a bulb?  Today people use the expression tulip mania to describe a phenomenon when the price of an asset cannot be explained with its intrinsic value: decor/beauty being the sole value a tulip provides to the buyer. And the pricing being seen as a bubble. Other examples for a bubble can be found in the stock markets or in housing in more recent decades. You can also check out the blog on Crypto (pt.2) - an investment? where I cover a sector which is receiving a lot of media attention. Another hyped sector in the last year is investing in Artificial Intelligence. I write about this topic and analyse one stock in Artificial Intelligence - a bubble?

Sources:

Tulip Mania -

Farmer Gracy´s https://www.farmergracy.co.uk/blogs/farmer-gracys-blog/tulip-mania-the-bubble-caused-by-the-love-of-flowers

Wikipedia https://en.wikipedia.org/wiki/Tulip_mania

Robert Taylor

https://fostervictor.com/lessons-from-the-tulip-bubble-to-modern-market-dynamics/#:~:text=The%20Tulip%20Bubble%20of%20the,largely%20underpinned%20by%20improved%20fundamentals.

History of the tulip https://amsterdamtulipmuseum.com/#

Definition of "mania": https://www.merriam-webster.com/dictionary/mania

Frequently Asked Questions (FAQs):

1. What can be learned from the Tulip Mania? Becoming too excited in money topics without having done proper due diligence is dangerous for your finances. People lost fortunes as a result, they traded homes for tulip bulbs. They exchanged a place where they can live for free for a flower! They thought prices can only go up and not down. Another lesson is trying to become wealthy over night is a dangerous endeavour at least. For many it did not end well.

2. What is a key feature of the Tulip Mania? People relied solely on price increases which could only come from more people willing to buy at higher prices. There was no income stream from owning tulip bulbs, that is a key difference to owning a bond or a stock. Once buyers stopped buying, owners of tulip bulbs could not do anything useful with the tulips from a financial point of view. Yet often those people had paid exorbitant prices.

3. Is the tulip mania the sole bubble in the history of finance? No. Two examples for bubbles are the Mississippi bubble in the very far past or the dotcom bubble in the more recent past. Maybe the tulip mania is the most well known bubble. For personal investors it is important to remember a bubble is not a unique event of the past never to happen again. It happens more often, usually when people forget the fundamentals of investing.