This article is an excerpt from the Shortform book guide to "A Random Walk Down Wall Street" by Burton G. Malkiel. Shortform has the world's best summaries and analyses of books you should be reading.
Like this article? Sign up for a free trial here .
What was the tulip craze? How could flowers become so valuable in such a short space of time?
The tulip craze in 17th-century Holland is widely known as the very first economic bubble. The price of tulips escalated so much that people sold their valuables to buy tulips, and could buy assets like houses with them. This might seem absurd, but here’s an explanation of what happened.
Learn more about the tulip craze below.
The Tulip Craze: What Went Wrong?
The tulip craze in 17th-Century Holland is often referred to as the first economic bubble in history. Here’s why castle-in-the-air thinking might be to blame.
The castle-in-the-air theory of asset valuation holds that an asset is only worth what someone else will pay for it. In other words, no asset has an “intrinsic value” that can be determined analytically or mathematically; rather, the value of an asset is purely psychological—it’s worth whatever the majority of investors think it’s worth.
A castle-in-the-air investor makes her money by investing in stocks she thinks other investors will value.
Speculative bubbles, of course, are examples of the castle-in-the-air theory run amok. In a bubble, investors completely disregard the intrinsic value of a stock for fantastical notions of assets’ values, often with disastrous results. And while some investors are savvy enough—or lucky enough—to sell just before the crash comes, most are left holding the bag.
Here’s a deeper look at the very first economic bubble in history:
An In-Depth Look
Arguably the most famous—or infamous—speculative bubble in history, the tulip craze that struck 17th-century Holland perfectly illustrates the dangers of castle-in-the-air investing.
———End of Preview———
Like what you just read? Read the rest of the world's best book summary and analysis of Burton G. Malkiel's "A Random Walk Down Wall Street" at Shortform .
Here's what you'll find in our full A Random Walk Down Wall Street summary :
- A comprehensive and entertaining introduction to the world of finance
- Practical investment principles that work for every skill level
- The advantages of index investing
