Tulip mania is considered to be one of the first economic bubbles which took place in the Netherlands during the 17th century. It might seem like a crazy fact when we look at it now but back then, tulips were produced only during a specific time of the year making them highly valuable. The bright multicolor appearance made them desirable to wealthy individuals of the time. However, some tulips were affected by a virus named mosaic which made them more appealing, triggering the speculation in prices of tulips.
Calvinism, a religious belief, restricted wealthy individuals from bragging about their extravagant lifestyle through displays of jewelry, expensive homes or clothing. However, there were no restrictions on tulip bulbs, hence, the bulbs became a symbol of defining status in society. Soon, a herd mentality developed and a craze spread among all walks of life and their primary goal was to buy low and sell high.
It reached tremendous heights when more and more investors joined the party, at one point a single tulip was worth equivalent to a luxurious house. People thought the prices would continue to rise forever, and began taking leverage to make profits. To intensify prices further, people begin trading future contracts, in simple words, investors could buy contracts with agreements that the buyer of the contract will receive the tulip at a specified date in future at a fixed price. The attention was now diverted from being a highly valuable asset to speculative asset. It fueled the speculative actions as people took on leverages in hope of making profit due to the rise in price of the tulip.
It reached its peak in the year 1637 when prices touched unsustainably high levels and investors started doubting whether it was worthy of investment. Buyers started hesitating on paying such absurd prices for a tulip which does not have any intrinsic value. Fear spread across among investors when prices reached a tipping point and then started reversing. Immediately, they comprehended the price may not rise further and panic sell started. Within weeks, the tulip price plummeted due to lack of buyers and people started defaulting on their debts leaving many investors and lenders bankrupt.
This event created financial distress for many individuals. Nonetheless, the pain was not significant enough to shake the entire Dutch economy, it was only confined to traders of tulips. This event displays one of the first speculative bubbles ever recorded and the aftermath. Greed among people to make quick profits from rising prices has never been sustainable and has often led to destruction. Yet, it is so difficult for us to control our actions during events like these due to the feeling of FOMO (Fear of Missing Out). The recent events might not be as peculiar as the tulip craze, but the underlying behavior during periods like this has stayed the same, people continue to react in similar fashion when confronted with greed and fear.