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| Stock Market Bubbles |
Definition
A stock market bubble is a type of economic bubble taking place in financial markets, in which a wave of public enthusiasm, evolving into herd
behavior, causes an exaggerated bull market. When such a bubble takes place, market prices of listed stocks rise dramatically, making them
significantly overvalued by any measure of stock valuation. Generally stock market bubbles are followed by stock market crashes.
Some of those bubbles are created because of intense and excessive speculation on a new technology or service. The dot-com boom of the late
1990s is one example. The biotech boom in the 1980s is another. Still other examples of stock market bubbles include Japanese stocks in the
late 1980s, Nifty Fifty stocks in the early 1970s, and Taiwanese stocks in 1987.
A stock market bubble may set the stage for a later stock market crash, continuing our example, the Stock market downturn of 2002.
A rational or irrational phenomenon?
Emotional and cognitive biases seems to be the causes of bubbles. But, often, when the phenomenon appears, pundits try to find a rationale, so as
not to be against the crowd. Thus, sometimes, people will dismiss concerns about overpriced markets by citing a new economy where the old stock
valuation rules may no longer apply. This type of thinking helps to further propagate the bubble whereby everyone is investing with the intent of
finding a greater fool.
Collective Behavior
Collective Behavior is a specialized term in sociology; it does not correspond to any common sense category. The term was first used by Robert E.
Park, and employed definitively by Herbert Blumer, to refer to social processes and events which do not reflect existing social structure (laws,
conventions, and institutions), but which emerge in a "spontaneous" way. Since such events occur when social prescriptions are not clear, they
exemplify neither conformity nor deviance. Here are some examples: religious revivals, a panic in a burning theatre, an outbreak of swastika
painting, a change in popular preferences in toothpaste, the Russian Revolution, and a sudden widespread interest in body piercing. The claim that
this set of seemingly diverse episodes constitutes a single field of inquiry is, of course, a theoretical assertion, and not all sociologists will agree
with it.
A stock market bubble is a type of economic bubble taking place in financial markets, in which a wave of public enthusiasm, evolving into herd
behavior, causes an exaggerated bull market. When such a bubble takes place, market prices of listed stocks rise dramatically, making them
significantly overvalued by any measure of stock valuation. Generally stock market bubbles are followed by stock market crashes.
Some of those bubbles are created because of intense and excessive speculation on a new technology or service. The dot-com boom of the late
1990s is one example. The biotech boom in the 1980s is another. Still other examples of stock market bubbles include Japanese stocks in the
late 1980s, Nifty Fifty stocks in the early 1970s, and Taiwanese stocks in 1987.
A stock market bubble may set the stage for a later stock market crash, continuing our example, the Stock market downturn of 2002.
A rational or irrational phenomenon?
Emotional and cognitive biases seems to be the causes of bubbles. But, often, when the phenomenon appears, pundits try to find a rationale, so as
not to be against the crowd. Thus, sometimes, people will dismiss concerns about overpriced markets by citing a new economy where the old stock
valuation rules may no longer apply. This type of thinking helps to further propagate the bubble whereby everyone is investing with the intent of
finding a greater fool.
Collective Behavior
Collective Behavior is a specialized term in sociology; it does not correspond to any common sense category. The term was first used by Robert E.
Park, and employed definitively by Herbert Blumer, to refer to social processes and events which do not reflect existing social structure (laws,
conventions, and institutions), but which emerge in a "spontaneous" way. Since such events occur when social prescriptions are not clear, they
exemplify neither conformity nor deviance. Here are some examples: religious revivals, a panic in a burning theatre, an outbreak of swastika
painting, a change in popular preferences in toothpaste, the Russian Revolution, and a sudden widespread interest in body piercing. The claim that
this set of seemingly diverse episodes constitutes a single field of inquiry is, of course, a theoretical assertion, and not all sociologists will agree
with it.
Some Examples
Tulip Mania
The term tulipomania (alternatively tulip mania) is used metaphorically to refer to any large economic bubble. The term originally came from the
period in the history of the Netherlands during which demand for tulip bulbs reached such a peak that enormous prices were charged for a
single bulb. It took place in the first part of the 17th century, especially in 1636-37.
The notability of this event is due to the book Extraordinary Popular Delusions and the Madness of Crowds written by popular British journalist
Charles Mackay in 1843, more than 200 years after the event. Mackay omitted mentioning that during 1636-37, the Netherlands suffered from an
epidemic of bubonic plague, and severe setbacks in the 30 Years War [1]. Modern scholars (e.g. Garber) consider the event much less
extraordinary than did Mackay.
History
The tulip, introduced to Europe in the middle of the 16th century, experienced a strong growth in popularity in the United Provinces (now the
Netherlands), boosted by competition between members of the upper classes for possession of the rarest tulips. Competition escalated until
prices reached unsustainable levels.
Tulip cultivation in the United Provinces is thought to have started in 1593, when Charles de L'Ecluse first bred tulips able to tolerate the harsher
conditions of the Low Countries from bulbs sent to him from Turkey by Ogier de Busbecq. The flower rapidly became a coveted luxury item and a
status symbol. Special breeds were given exotic names or named after Dutch naval admirals. The most spectacular and highly sought-after tulips
had vivid colors, lines, and flames on the petals as a result of being infected with a tulip-specific virus known as the Tulip Breaking potyvirus.
In 1623, a single bulb of a famous tulip variety could cost as much as a thousand Dutch florins (the average yearly income at the time was 150
florins). Tulips were also exchanged for land, valuable livestock, and houses. Allegedly, a good trader could earn sixty thousand florins a month.
By 1635, a sale of 40 bulbs for 100,000 florins was recorded. By way of comparison, a ton of butter cost around 100 florins and "eight fat swine" 240
florins. A record was the sale of the most famous bulb, the Semper Augustus, for 6,000 florins in Haarlem.
By 1636, tulips were traded on the stock exchanges of numerous Dutch towns and cities. This encouraged trading in tulips by all members of
society, with many people selling or trading their other possessions in order to speculate in the tulip market. Some speculators made large profits
as a result.
Some traders sold tulip bulbs that had only just been planted or those they intended to plant (in effect, tulip futures contracts). This phenomenon
was dubbed windhandel, or "wind trade", and took place mostly in the taverns of small towns using an occult slate system to indicate bid prices.
State edict in 1610 made that trade illegal by refusing to enforce the contracts, but the legislation failed to curtail the activity.
In February 1637 tulip traders could no longer get inflated prices for their bulbs, and they began to sell. The bubble burst. People began to suspect
that the demand for tulips could not last, and as this spread a panic developed. Some were left holding contracts to purchase tulips at prices now
ten times greater than those on the open market, while others found themselves in possession of bulbs now worth a fraction of the price they had
paid. Thousands of Dutch, including businessmen and dignitaries, were financially ruined.
Attempts were made to resolve the situation to the satisfaction of all parties, but these were unsuccessful. Ultimately, individuals were left in the
situation they found themselves in at the end of the crash—no court would enforce payment of a contract, since judges regarded the debts as
contracted through gambling, and thus not enforceable in law.
Lesser versions of the tulipomania also occurred in other parts of Europe, although matters never reached the state they had in the Netherlands. In
England in 1800, it was common to pay fifteen guineas for a single tulip bulb. This sum would have kept a labourer and his family in food, clothes
and lodging for six months.
Tulip Mania
The term tulipomania (alternatively tulip mania) is used metaphorically to refer to any large economic bubble. The term originally came from the
period in the history of the Netherlands during which demand for tulip bulbs reached such a peak that enormous prices were charged for a
single bulb. It took place in the first part of the 17th century, especially in 1636-37.
The notability of this event is due to the book Extraordinary Popular Delusions and the Madness of Crowds written by popular British journalist
Charles Mackay in 1843, more than 200 years after the event. Mackay omitted mentioning that during 1636-37, the Netherlands suffered from an
epidemic of bubonic plague, and severe setbacks in the 30 Years War [1]. Modern scholars (e.g. Garber) consider the event much less
extraordinary than did Mackay.
History
The tulip, introduced to Europe in the middle of the 16th century, experienced a strong growth in popularity in the United Provinces (now the
Netherlands), boosted by competition between members of the upper classes for possession of the rarest tulips. Competition escalated until
prices reached unsustainable levels.
Tulip cultivation in the United Provinces is thought to have started in 1593, when Charles de L'Ecluse first bred tulips able to tolerate the harsher
conditions of the Low Countries from bulbs sent to him from Turkey by Ogier de Busbecq. The flower rapidly became a coveted luxury item and a
status symbol. Special breeds were given exotic names or named after Dutch naval admirals. The most spectacular and highly sought-after tulips
had vivid colors, lines, and flames on the petals as a result of being infected with a tulip-specific virus known as the Tulip Breaking potyvirus.
In 1623, a single bulb of a famous tulip variety could cost as much as a thousand Dutch florins (the average yearly income at the time was 150
florins). Tulips were also exchanged for land, valuable livestock, and houses. Allegedly, a good trader could earn sixty thousand florins a month.
By 1635, a sale of 40 bulbs for 100,000 florins was recorded. By way of comparison, a ton of butter cost around 100 florins and "eight fat swine" 240
florins. A record was the sale of the most famous bulb, the Semper Augustus, for 6,000 florins in Haarlem.
By 1636, tulips were traded on the stock exchanges of numerous Dutch towns and cities. This encouraged trading in tulips by all members of
society, with many people selling or trading their other possessions in order to speculate in the tulip market. Some speculators made large profits
as a result.
Some traders sold tulip bulbs that had only just been planted or those they intended to plant (in effect, tulip futures contracts). This phenomenon
was dubbed windhandel, or "wind trade", and took place mostly in the taverns of small towns using an occult slate system to indicate bid prices.
State edict in 1610 made that trade illegal by refusing to enforce the contracts, but the legislation failed to curtail the activity.
In February 1637 tulip traders could no longer get inflated prices for their bulbs, and they began to sell. The bubble burst. People began to suspect
that the demand for tulips could not last, and as this spread a panic developed. Some were left holding contracts to purchase tulips at prices now
ten times greater than those on the open market, while others found themselves in possession of bulbs now worth a fraction of the price they had
paid. Thousands of Dutch, including businessmen and dignitaries, were financially ruined.
Attempts were made to resolve the situation to the satisfaction of all parties, but these were unsuccessful. Ultimately, individuals were left in the
situation they found themselves in at the end of the crash—no court would enforce payment of a contract, since judges regarded the debts as
contracted through gambling, and thus not enforceable in law.
Lesser versions of the tulipomania also occurred in other parts of Europe, although matters never reached the state they had in the Netherlands. In
England in 1800, it was common to pay fifteen guineas for a single tulip bulb. This sum would have kept a labourer and his family in food, clothes
and lodging for six months.
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Trader : Herman Bogaerts --- Tradersname : Freedom --- Portable : 0033.(0).683.13.99.99
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E-Mail : Herman.Bogaerts@Wanadoo.fr --- Herman_Bogaerts@Yahoo.com
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