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Famous First Bubbles
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Famous First Bubbles

The Fundamentals of Early Manias

Peter M. Garber
MIT Press, 2000
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6

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Recommendation

During the collapse of the so-called Internet bubble, the legendary Dutch fiscal intoxication with tulips, called tulipmania, was widely cited as a lesson from history. The financial press hyped stories of deluded Dutch farmers who mortgaged all their worldly possessions to purchase a single prize tulip bulb, only to meet financial ruin when the bubble inevitably burst. Economist Peter M. Garber dug into history, and found that most of the common wisdom about the tulipmania was false. So, if you ever wondered how Dutch investors could have been so foolish, there is a simple answer: they weren’t. Famous First Bubbles clearly evolved from a series of academic papers but, nonetheless, the book is entertaining. The primary focus on the tulip bubble makes the sections on the Mississippi and South Sea Bubbles seem like afterthoughts. getAbstract.com recommends this to iconoclasts who enjoy debunking historical legends and to bubble watchers everywhere.

Summary

What Is a Bubble?

Amid the bursting of the putative Internet bubble, the financial press waxed eloquent about "bubbles" in the stock market without precisely defining the term. Essentially, a price increase becomes a bubble if the price suddenly drops. The implication is that investors who buy into the price increase are also buying into a mass delusion, and their purchases are therefore irrational. Alan Greenspan’s famous phrase "irrational exuberance" has also entered the vernacular of bubbles.

However, this definition can only be applied after the fact. When the upswing in prices is happening, investors look foolish if they don’t buy. Only after a price drop are those purchases denounced as foolishly speculative. If the rise in prices turns out to be justified, the investors look brilliant instead of foolish, and no one calls the increase a bubble.

Three famous historical events are usually invoked as bubbles: The Dutch tulipmania of 1634-1637, the Mississippi Bubble of 1719-1720 and the South Sea Bubble of 1720. Experts flag these events to caution investors about irrational speculation, which is also the reason they are cited by supporters of increased government...

About the Author

Peter M. Garber is a global strategist at Global Markets Research at Deutsche Bank and Professor of Economics at Brown University

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