Red-Blooded Risk: The Secret History of Wall Street

Tulips

The most famous bubble in history is tulpenwoede—tulipomania—in the early 1600s in Holland. This event was popularized by the journalist Charles Mackay, who wrote Extraordinary Popular Delusions and the Madness of Crowds in 1841. He told of a population going wild, spending incredible amounts of money on tulip bulbs and contracts for future delivery of tulips. When the bubble popped in February 1637, there was widespread ruin and economic misery.

The first important thing to understand is that people were not paying the high prices for single flowers. Tulips grow from bulbs. Each year they produce a flower, in some cases several blossoms, in spring or early summer, depending on the climate. The flowers produce seeds, which grow into new bulbs over anywhere from six to 12 years. But bulbs also give off buds, which can grow into new bulbs in a year or two. The desirable coloration patterns that make particular tulips valuable come from a mosaic virus infection, and the infection—hence the valuable coloration—is passed along only to progeny that come from buds. The most striking patterns come from the sickest bulbs, which therefore reproduce slowly.

Professional growers were constantly on the lookout for interesting new patterns. When they found one, they would carefully nurture its buds, striving to build a stock of bulbs with stable and striking coloration that were healthy enough to thrive. When that task was complete, the next step was to popularize the new variety.

One ...