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  • How much would you pay for a bouquet of tulips?

  • A few dollars? A hundred dollars?

  • How about a million dollars?

  • Probably not.

  • Well, how much would you pay for this house,

  • or partial ownership of a website that sells pet supplies?

  • At different points in time,

  • tulips, real estate and stock in

  • have all sold for much more than they were worth.

  • In each instance, the price rose and rose and then abruptly plummeted.

  • Economists call this a bubble.

  • So what is exactly is going on with a bubble?

  • Well, let's start with the tulips to get a better idea.

  • The 17th century saw the Netherlands enter the Dutch golden age.

  • By the 1630s, Amsterdam was an important port and commercial center.

  • Dutch ships imported spices from Asia in huge quantities

  • to earn profits in Europe.

  • So Amsterdam was brimming with wealthy, skilled merchants and traders

  • who displayed their prosperity by living in mansions

  • surrounded by flower gardens.

  • And there was one flower in particularly high demand:

  • the tulip.

  • The tulip was brought to Europe on trading vessels

  • that sailed from the East.

  • Because of this, it was considered an exotic flower

  • that was also difficult to grow,

  • since it could take years for a single tulip to bloom.

  • During the 1630s, an outbreak of tulip breaking virus

  • made select flowers even more beautiful

  • by lining petals with multicolor, flame-like streaks.

  • A tulip like this was scarcer than a normal tulip

  • and as a result, prices for these flowers started to rise,

  • and with them, the tulip's popularity.

  • It wasn't long before the tulip became a nationwide sensation

  • and tulip mania was born.

  • A mania occurs when there is an upward movement of price

  • combined with a willingness to pay large sums of money

  • for something valued much lower in intrinsic value.

  • A recent example of this is the dot-com mania of the 1990s.

  • Stocks in new, exciting websites were like the tulips of the 17th century.

  • Everybody wanted some.

  • The more people who wanted the tulip, the higher the price could go.

  • At one point, a single tulip bulb

  • sold for more than ten times the annual salary of a skilled craftsman.

  • In the stock market,

  • the price of stock is based on the supply and demand of investors.

  • Stock prices tend to rise

  • when it seems like a company will earn more in the future.

  • Investors might then buy more of the stock,

  • raising the prices even further due to an increased demand.

  • This can result in a feedback loop where investors get caught up in the hype

  • and ultimately drive prices far above intrinsic value,

  • creating a bubble.

  • All that is needed for a mania to end and for a bubble to burst

  • is the collective realization that the price of the stock,

  • or a tulip, far exceeds its worth.

  • That's what happened with both manias.

  • Suddenly the demand ended.

  • Prices were pushed to staggering lows,

  • and pop!

  • The bubbles burst, and the market crashed.

  • Today, scholars work long and hard trying to predict what causes a bubble

  • and how to avoid them.

  • Tulip mania is an effective illustration

  • of the underlying principles at work in a bubble

  • and can help us understand more recent examples

  • like the real estate bubble of the late 2000s.

  • The economy will continue to go through phases

  • of booms and busts.

  • So while we wait for the next mania to start,

  • and the next bubble to burst,

  • treat yourself to a bouquet of tulips

  • and enjoy the fact that you didn't have to pay an arm and a leg for them.

How much would you pay for a bouquet of tulips?

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B2 US TED-Ed tulip mania bubble stock price

【TED-Ed】What causes economic bubbles? - Prateek Singh

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    iamkai903232 posted on 2015/05/06
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