Every time a new asset class soars beyond reason, someone invokes tulip mania. Bitcoin, meme stocks, AI valuations: all get compared to 17th century Dutch speculators supposedly trading houses for flower bulbs. The comparison is meant as a warning, a reminder that speculative bubble psychology has been ruining investors for four centuries. There is just one problem: the tulip mania story we tell ourselves is mostly fiction.
Anne Goldgar, a historian at King’s College London who spent years researching the original Dutch archives, found something remarkable: “I couldn’t find anybody that went bankrupt. If there had been really a wholesale destruction of the economy as the myth suggests, that would’ve been a much harder thing to face.”[s] The tales of an innocent sailor jailed for eating a bulb and chimney sweeps wading into the market in hopes of striking it rich? They come not from historical records but from propaganda pamphlets published by Dutch Calvinists worried about societal decay.[s] We have been citing morality plays as economic data for nearly 400 years.
The Myth That Won’t Die
The modern tulip mania narrative traces largely to Charles Mackay’s 1841 book “Extraordinary Popular Delusions and the Madness of Crowds.” Mackay claimed the speculation ruined the Dutch economy. What he actually did was plunder satirical songs from 1637 and present them as historical fact.[s] The irony is rich: Mackay himself got caught up in the British railway bubble of the 1840s, which scholars consider one of the biggest technology bubbles in history.[s]
Goldgar’s archival research found that while some tulips did fetch extraordinary prices, the phenomenon was limited. Only 37 people spent more than 300 guilders on bulbs, roughly a master craftsman’s yearly wage.[s] Most participants came from the merchant and skilled artisan class, people who could afford to speculate. No canals filled with bankrupt corpses. No economic collapse. The Dutch economy continued humming along.
Why We Prefer the Fable
If the historical tulip mania was comparatively modest, why has its myth proved so durable? Because it offers a comforting explanation for speculative bubble psychology: that bubbles are caused by other people’s stupidity. If only those foolish Dutch had been smarter, more rational, less greedy. If only today’s crypto enthusiasts would learn from history.
This framing is comfortable and useless. Speculative bubble psychology does not operate on the level of individual intelligence. Nobel laureate Robert Shiller defines a bubble as “a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person.”[s] Note the key word: contagion. Bubbles spread like social diseases, and exposure does not require ignorance.
The Psychology That Actually Drives Bubbles
Understanding speculative bubble psychology requires moving past morality tales. The behavioral patterns that fuel bubbles are not character flaws; they are features of human cognition that served us well for most of evolutionary history.
Herd behaviorThe tendency of investors to follow the crowd rather than independent analysis, amplifying market trends and creating self-reinforcing price spirals., for instance, is often rational. In situations of uncertainty, following the crowd can be a sensible shortcut.[s] The problem is that in financial markets, this behavior creates feedback loops. Prices rise not because fundamentals improve but because others expect them to rise, which attracts more buyers, which pushes prices higher.
Then there is FOMO, the fear of missing out. Ross Mayfield at Baird Wealth calls it “the defining feature of all the major asset bubbles of the last 400 years.”[s] Watching others profit while you stand on the sidelines creates genuine psychological pain. That pain drives late-stage buying even when valuations look absurd.
Howard Marks, co-chairman of Oaktree Capital, adds another piece: novelty. Bubbles, in Marks’s framing, form around a new and exciting development that encourages investors to imagine limitless upside, untethered from historical experience.[s] The internet was genuinely revolutionary; the dot-com bubble was still a bubble. AI may transform civilization; that does not mean every AI stock is worth its current price.
The Overconfidence Trap
Speculative bubble psychology becomes especially dangerous as prices rise. Early gains reinforce overconfidence. “Even poorly informed investment decisions can appear to be clever strategy,” notes one analysis. “This fosters a false sense of skill and control.”[s]
Consider the Greater Fool TheoryThe belief that an overpriced asset can always be sold at a profit to someone willing to pay even more. Drives late-stage buying in speculative bubbles.: the assumption that there will always be someone willing to pay more. During the 1990s dot-com boom, plenty of sophisticated investors knew prices were stretched. They kept buying anyway, confident they would spot the turning point and exit before the crash. Most did not. A 2025 Bank of America survey found that 91% of fund managers believed the market was overvalued, yet bullish sentiment continued to grow.[s]
This is not stupidity. This is speculative bubble psychology operating exactly as it always has. Whether you are looking at the Dutch Republic in the 1630s or the Japanese real estate bubble of the 1980s, all market cycles undergo the same phases.[s]
Why Knowledge Fails
Here is the uncomfortable truth: knowing about bubbles does not protect you from them. Howard Marks observes that investors lose money again and again because they forget that cycles are inevitable, and that there is no such thing as a free lunch.[s] But this is not really forgetting. It is a systematic failure of knowledge to override emotion.
Shiller, despite having literally written the book on irrational exuberance, acknowledges the pattern keeps recurring: “Evidence of bubbles has accelerated since the [2008] crisis. Valuations in the stock and bond markets have reached high levels.”[s] Even the economists who study bubbles professionally cannot prevent them.
At the heart of speculative bubble psychology, in Marks’s framing, is the toxic interplay of greed and optimism: investors chase high returns with low perceived risk, overpay for trendy assets, and hold on too long, hoping for even greater gains.[s] These impulses are not bugs in human cognition; they are features. They helped our ancestors compete for resources in environments where being left out of a group opportunity could mean death.
The Real Lesson
The standard takeaway from tulip mania is “don’t be an idiot.” That advice is worthless. Bubble participants are not idiots; they are humans operating under conditions that reliably produce irrational collective behavior.
The dot-com bubble “was right about the promise of tech, only the bubble came 10-15 years too early,” according to Giuseppe Sette at Reflexivity.[s] Amazon and eBay survived and thrived. The underlying technology was transformative. None of that prevented the bubble or the crash.
If speculative bubble psychology is hardwired, what actually helps? Not warnings. Not cautionary tales. Not finger-wagging about historical precedents. Shiller argues that “regulators and policymakers have to use their human judgement” rather than trusting markets to self-correct.[s] That means structural interventions: margin requirements, position limits, macroprudential regulationFinancial oversight aimed at reducing systemic risks to the entire economy, rather than monitoring individual institutions. Includes tools like margin requirements and position limits., and perhaps most importantly, accepting that markets will periodically go insane no matter how educated the participants.
We keep telling ourselves the tulip mania story as if understanding it will inoculate us. It will not. Four hundred years of speculative bubble psychology prove that humans are remarkably consistent in their capacity for collective financial delusion. The question is not how to make people smarter. The question is how to build systems that account for what people actually are.
