04 Feb Bubble Trouble

In 1636 a sailor sadly mistook the valuable tulip bulb of a merchant for an onion and grabbed it to eat. The merchant and his family chased the sailor to find him “eating a breakfast whose cost might have regaled a whole ship’s crew for a twelvemonth”. The sailor was jailed for eating the bulb.  Tulips are poisonous if prepared incorrectly, taste bad, and are considered to be only marginally edible even during famines.

Economic history is littered with examples of financial bubbles which saw asset prices soar within a rapid period of time to unsustainable levels and then crash back down to earth again.  These inflated asset classes could be in the form of stocks, property, goods or sectors.  This article examines one of the earliest bubbles and its symptoms, what causes a bubble to develop, its various stages of development, and asks why do humans continue to ignore the risks of large financial losses in their risk behaviour?

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