Posted by on Nov 14, 2011 in Articles & Advice, Blog, Featured, Posts |

By Jason Zweig  |  Nov. 11, 2011 12:23 pm ET

Image credit: Hans Bollongier, “Still Life with Flowers” (1639), Rijksmuseum


In my recent column on Charles Mackay’s classic book Extraordinary Popular Delusions and the Madness of Crowds, I pointed out that “the most famous critic of bubbles who ever lived fell like a chump for a craze that was unfolding before his very eyes.” Just three years after writing his book documenting “the utter madness of the people,” Mackay became radically bullish on absurdly overvalued British railway stocks.

Mackay’s book is still enormously entertaining—and worth reading—170 years after it was published. But Mackay is often quoted as though he were an objective authority on the history of notorious bubbles like the 17th century Dutch tulip mania and the South Sea stock bubble of 1720 in England.

Readers should bear in mind that Mackay was a storyteller, and that modern researchers have been unable to confirm some of his best-known anecdotes—and have disproved others altogether.

Mackay describes what investors today would call a “blind pool,” an initial public offering, or IPO, that raises capital for undisclosed purposes:

…the most absurd and preposterous of all [stock offerings], and which [showed], more completely than any other, the utter madness of the people, was one started by an unknown adventurer, entitled, “A company for carrying on an undertaking of great advantage, but nobody to know what it is.”

Bloggers frequently cite this example when they want to declare something a bubble-in-the-making; a quick Google search turns up nearly 13,000 hits on “a company for carrying on an undertaking of great advantage.”

But John Carswell, in his 1961 book The South Sea Bubble, reported that he could find no evidence that any such offering had ever occurred. And Richard Dale, in his 2004 book The First Crash, wrote that many of the strangest-sounding IPOs of 1720 were “no doubt hoaxes,” perhaps invented outright by unscrupulous newspaper editors trying to gin up circulation in the reckless early days of journalism.

Mackay also tells two unforgettable stories about tulip bulbs from the peak of that speculative market in Holland of the 1630s.

In one of these anecdotes, a Dutch sailor ended up spending months in jail for eating a tulip bulb worth 3,000 gold coins after he mistook it for an onion. In the other, Mackay described a single tulip bulb that changed hands for an immense shipment of goods including several tons of grain and beer, 24 farm animals, 1,000 pounds of cheese and a silver chalice.

But in his book Famous First Bubbles, published in 2000, economist Peter M. Garber showed that the original source of the story about the sailor’s misbegotten meal is a second-hand account that was written 70 years after the fact. Furthermore, Garber showed, the sale of another bulb for a massive shipment of goods was “a non-existent transaction.” It simply never happened.

None of this will prevent people from continuing to retell these stories. But it should discourage you from believing them. The investing masses do go mad from time to time, but spotting the madness remains more art than science.



Additional resources:



Chapter Four, “Prediction,” in Your Money and Your Brain

Chapter Eight, “The Investor and Stock Market Fluctuations,” in The Intelligent Investor

Anne Goldgar, Tulipmania: Money, Honor, and Knowledge in the Dutch Golden Age

Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds



The Museum of Art and Finance, Gallery 1: Tulipmania

The Extraordinary Popular Delusion of Bubble Spotting

Escaping the Magnetic Pull of a Bubble

A Short History of Folly

What’s Speculating? What’s Investing? Some of the Wisest Investors Weigh In

Let’s Be Honest: Are You an Investor or a Speculator?

Are You an Investor or a Speculator? (Part One)

Are You an Investor or a Speculator? (Part Two)


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