Saturday, 3 March 2012

Was it a bubble or not after all?

Previously hardly ever mentioned tulipmania was brought back into the picture in 1950s, after the capital theory development and detection of unsteady asset prices. Experiential irregularities in a finance field are believed to be the first ones that referenced tulipmania as a bubble.

A.Maurits van der Veen (2009) believes the tulipmania must indeed be classified as a bubble. His main arguments were: the sharp increase in price (from only a few to a few hundred guilders), and, social networks. Maurits (2009) claims that any attempt to research the phenomena is, to some extent, imprecise: there is no reliable source of information - some of it is taken from a painting book with no exact prices or dates, the use of different measures (some sold in units, some in bulk) did not reflect values.

The bubble argument can be supported by his theory of social networks. Maurits (2009) believe traders not entirely bought and sold bulbs depending on their private information, but because they were interconnected by trade or friendships, it allowed them to base their decisions taking into account actions of other traders. It implies that dealers rationally may disregard their own private information and pay too much attention to others, when judging the demand and supply of the market, hence stimulating  the emergence of the bubble.

Maurits (2009) argued the tulipmania can be “qualified as a bubble, in a sense that prices were not sustained by a private estimation of value”. He also suggested some lessons to learn from the tulip bubble: “the lessons to be drawn from the bubble are less about a spectacular rise in prices followed by a collapse, and more about the social structures within which the market is embedded”. For instance, the rating agency Moody’s disappointed its customers and destroyed a long built trust (which was delivered through reliable ruling) by providing false credit ratings. His arguments can also be backed up by Madoff investment scandal, and a subprime mortgage crisis.

Maurits (2009) stated that a central message arose from the tulip bubble which can be associated with current financial crises:

“The tulip bubble continues to be relevant, then, not because it shows that there have always been people willing to pay many times what something is fundamentally worth, but because it demonstrates that such people tend to be social fools rather than economic idiots”
Full article on Maurits (2009) research can be found here.
Some economists disagree to consider the tulipmania as a bubble, since it lasted a short period of time, but rather cite it as a consequence of irrational behaviour. I agree with Maurits (2009) point of view. Even though some argue that only increase in asset prices over the long-run followed by a sharp fall can be qualified as a bubble (the tulipmania does not qualify it), did it never appear to anyone that it might be due to the fact it was the first bubble ever?

The history repeats itself, and it has been proven by all the crises humanity lived through: the Mississippi bubble (1719-20), Railway Mania (1844-47), the Great Depression (1930s), the Dot-com bubble (1990s), the Credit Crunch (2007), and who knows how many more there will be. The main lesson to learn for all the countries is not to ignore the past, but try to build a safer future. To sum up, I found this great video which shows how the tulip bubble relates to nowadays, and why it should be a matter of interest. You can watch it here:

The tulipmania, for one can sound like a silly fairytale, for the other the most important piece in a tricky financial world puzzle, judge yourself, I agree to disagree.

Friday, 2 March 2012

Fun facts!

Did you know, it is possible to find out all the names, prices and weights of tulips traded in Netherlands during the tulip mania, as it was recorded by Haarlem florist P.Cos in a plant catalogue.

Did you know, heavy bulbs of a popular kind of tulips were sold for 3000 and 4000 guilders (weighting 400, 600 aasen respectively). At a time, a 600 aasen bulb of Viceroy could buy you a silver cup, a small ship, eight pigs or a dozen of sheep.

Did you know, the most expensive and rare tulip, Semper Augustus, in 1620s could be sold for 1000 guilders, while during the tulipmania, just before the crash, the price has increased ten times - to 10,000 guilders. That sum of money was big enough to purchase a luxurious house in Amsterdam or live off a lifetime.

Did you know, that 'the mystery' of  the tulip bulb flowering plain one season, and bright and vivid another season, was actually caused by a virus! Indeed, the Semper Augustus itself, deep-red flares and sparks of it were the result of aphids.

Hans Bollongier (1644) painted an extraordinary Semper Augustus to reveal its beauty and severity displaying drown of other flowers, proving why it was so desired.

Did you know, that tulips were named after their breeders, believing that it will make them more attractive and expensive: The Admirael van Enkhuizen (named after town where it was believed to be bred), Coornhert Tulip (after famous trader Volkert Dircksz Coornhart), etc.

Did you know, the tulip book, The Judith Leyster, was named after the one and only woman artist in Netherlands during the tulipmania. We can now only imagine what level of honour and recognition this meant.

Judith Leyster (1643), painting which was also the cover of the book. 

Did you know, what the word Flora means? Flora was the name of the Roman goddess of flowers meaning springtime, plants and fertility. Historical sources hold she was also a Greek nymph, therefore Christians saw her as a courtesan. The metaphor has been found by the Dutch, as they saw that both, the Roman “whore”and tulip bulbs, were exchanged from hand to hand at increasing prices.

Did you know, that after the craze of tulips eased off, at about the start of the 18th century, wealthy Dutch collectors were obsessed with imports from India – seashells. It did not become as popular as tulips, but still were traded at high prices (50 – 300 guilders).

Did you know, a famous Welsh historian writer, Mike Dash, in 2001 published a book, “Tulipomania: The Story of the World’s Most Coveted Flower & the Extraordinary Passions It Aroused”, which explores the urban phenomenon of Ducth greed in great detail. For those who are enjoying my blog and are genuinely interested in a topic.


Thursday, 1 March 2012

The PLC and the bubble: related or not?

Any good goes through multiple stages in a life of a product (the PLC). Those stages being: introduction, growth, maturity, decline. Similarly, steps of the good which may cause a bubble incorporates parallel phases: introduction, boom, bubble, burst. Does it have something in common? Some may argue that I am comparing two unrelated schemes (and mixing up marketing with finance), but it does have familiarities.

The length of each stage depends on an individual good. Although, the price pattern in PLC and the bubble demonstrates reversed characteristics. In the PLC, at the introductory stage the cost of a product is high, but sales volume is low; passing through the rest of the stages' price tends to decline increasing sales volume. In the bubble, a product may be stuck at the introductory stage for years or even centuries (until for some social or economic reasons it becomes madly popular), it associates low prices, but as time pass prices rise rapidly. However, when the good reaches its decline/burst stage, demand for it falls reducing the volume of sale and diminishing profits. All good things come to an end, just in the case of the PLC, the end of life for a product does not mean painful consequences to a society and a long recovery process, as in the case of the bursting bubble...