…and yet another argument to support Garber

Another research by E. A. Thompson (2006), “Tulipmania: the fact or artifact”, supports the notion that the tulipmania is not a bubble. He argued: “bubbles require the existence of mutually-agreed-upon prices that exceed fundamental values”. Thompson (2006) described the episode simply as “the period during which the prices in future contracts have been legally, albeit temporarily, converted into options exercise prices”. E. A. Thompson (2006) research follows P. M. Garber's (1990) work, and achieves to demonstrate that the more accurate data set allows the comparison of the price decline in a various bulb markets (i.e. he specifically looked at the hyacinth price dynamics).

Thompson (2006) indicates that the increase in tulip bulb prices may have been caused by the “Thirty - Year’s War”. He also explains that the main mistake, which must have led to the tulip market crash, was the arrangement of contracts. In 1636 Autumn contracts reflected the expectation rather than real values, hence “contract price being a call-option exercise”, or strike (set at around 10 times the actual prices), “rather than a price committed to be paid for future bulbs”. Option holders were not bind to pay the contract price if the spot price appeared to fall below the contract price, hence they would only have to pay a small compensation fee in a case of cancelled contract.

Informed traders managed to liquidate their contracts escaping the crash, whilst uninformed, ‘noise’ traders, did not possess any valuable market information which would have saved them from bankruptcy.

Thompson (2006) disagreed with Mackay’s (1841) view of tulipmania as “a delusion and madness of crowds”, on the other hand, he proved that a market was fully functioning, with contract prices adjusting to an economic environment. In Thompson (2006) opinion, the tulip market crash was initiated purely by the fact that there has been a shift from future contracts to options. An article on his research can be accessed here.