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How much would you pay [br]for a bouquet of tulips?

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A few dollars? A hundred dollars?

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How about a million dollars?

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Probably not.

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Well, how much would you [br]pay for this house,

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or partial ownership of a website[br]that sells pet supplies?

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At different points in time,

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tulips, real estate and stock in pets.com

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have all sold for much more [br]than they were worth.

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In each instance, the price rose and rose[br]and then abruptly plummeted.

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Economists call this a bubble.

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So what is exactly is going on [br]with a bubble?

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Well, let's start with the tulips[br]to get a better idea.

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The 17th century saw the Netherlands[br]enter the Dutch golden age.

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By the 1630s, Amsterdam was an important[br]port and commercial center.

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Dutch ships imported spices[br]from Asia in huge quantities

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to earn profits in Europe.

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So Amsterdam was brimming with wealthy, [br]skilled merchants and traders

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who displayed their prosperity [br]by living in mansions

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surrounded by flower gardens.

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And there was one flower [br]in particularly high demand:

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the tulip.

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The tulip was brought [br]to Europe on trading vessels

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that sailed from the East.

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Because of this, it was considered[br]an exotic flower

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that was also difficult to grow,

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since it could take years [br]for a single tulip to bloom.

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During the 1630s, an outbreak [br]of tulip breaking virus

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made select flowers even more beautiful

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by lining petals with multicolor,[br]flame-like streaks.

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A tulip like this was scarcer[br]than a normal tulip

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and as a result, prices for these flowers[br]started to rise,

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and with them, the tulip's popularity.

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It wasn't long before the tulip [br]became a nationwide sensation

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and tulip mania was born.

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A mania occurs when there is an upward[br]movement of price

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combined with a willingness [br]to pay large sums of money

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for something valued much lower[br]in intrinsic value.

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A recent example of this [br]is the dot-com mania of the 1990s.

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Stocks in new, exciting websites [br]were like the tulips of the 17th century.

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Everybody wanted some.

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The more people who wanted the tulip,[br]the higher the price could go.

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At one point, a single tulip bulb

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sold for more than ten times[br]the annual salary of a skilled craftsman.

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In the stock market,

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the price of stock is based on the supply [br]and demand of investors.

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Stock prices tend to rise

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when it seems like a company [br]will earn more in the future.

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Investors might then buy more[br]of the stock,

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raising the prices even further[br]due to an increased demand.

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This can result in a feedback loop[br]where investors get caught up in the hype

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and ultimately drive prices [br]far above intrinsic value,

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creating a bubble.

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All that is needed for a mania to end[br]and for a bubble to burst

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is the collective realization [br]that the price of the stock,

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or a tulip,[br]far exceeds its worth.

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That's what happened with both manias.

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Suddenly the demand ended.

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Prices were pushed to staggering lows,

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and pop!

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The bubbles burst, and the market crashed.

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Today, scholars work long and hard[br]trying to predict what causes a bubble

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and how to avoid them.

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Tulip mania is an effective illustration

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of the underlying principles [br]at work in a bubble

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and can help us understand [br]more recent examples

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like the real estate bubble [br]of the late 2000s.

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The economy will continue [br]to go through phases

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of booms and busts.

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So while we wait [br]for the next mania to start,

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and the next bubble to burst,

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treat yourself to a bouquet of tulips

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