When Confirmation Bias Shapes Your Knowledge

How many people think Tulipmania was one of the first recorded behavioral economics financial disasters? Here is a quote from the crowd sourced Wikipedia page on the event.

Tulip mania (Dutch: tulpenmanie) was a period in the Dutch Golden Age during which contract prices for some bulbs of the recently introduced and fashionable tulip reached extraordinarily high levels and then dramatically collapsed in February 1637.[2] It is generally considered the first recorded speculative bubble;[3] although some researchers have noted that the Kipper und Wipper (literally Tipper and See-saw) episode in 1619–1622, a Europe-wide chain of debasement of the metal content of coins to fund warfare featured mania-like similarities to a bubble.[4] In many ways, the tulip mania was more of a hitherto unknown socio-economic phenomenon than a significant economic crisis. And historically, it had no critical influence on the prosperity of the Dutch Republic, the world’s leading economic and financial power in the 17th century. The term “tulip mania” is now often used metaphorically to refer to any large economic bubble when asset prices deviate from intrinsic values.[5]

Confirmation bias and our natural tendency to think in linear terms would allow you to compare any speculative bubble to Tulipmania and immediately notice the similarities. Today, the stock market run up has been compared to tulips and so has cryptocurrency.

What if I told you there was no speculative bubble in tulips?

Your first instinct would be to think I was 100% crazy and you would discount any point I pushed forward. I mean, all your life you have heard in conversation, snide remarks, and even in history books that Tulipmania happened. It’s on crowd-sourced Wikipedia for God’s sake, it has to be true.

If you look at original sources though, it might not be true. That’s why I found this article really interesting.

None of the supposed “facts” about Tulipmania are facts at all, except that prices rose and prices fell. Sure, some people lost money but it wasn’t devastating to the economy.  In fact, it had less of an effect on the local economy than the internet bubble bursting did in 2001.  People didn’t kill themselves.  People’s entire fortunes were not destroyed.  Yet, the myth persists because it’s a great story and preys upon a lot of the natural fears humans hold inside of them.

Professor of History Anne Golder writes,

“We can blame a few authors and the fact they were bestsellers. In 1637, after the crash, the Dutch tradition of satirical songs kicked in, and pamphlets were sold making fun of traders. These were picked up by writers later in the 17th century, and then by a late 18th-century German writer of a history of inventions, which had huge success and was translated into English. This book was in turn plundered by Charles Mackay, whose Extraordinary Popular Delusions and the Madness of Crowds of 1841 has had huge and undeserved success. Much of what Mackay says about tulip mania comes straight from the satirical songs of 1637 – and it is repeated endlessly on financial websites, in blogs, on Twitter, and in popular finance books like A Random Walk down Wall Street. But what we are hearing are the fears of 17th-century people about a 17th-century situation.” 

Is crypto another round of Tulipmania?  Probably not.  People will make and lose money over crypto but crypto is a pervasive technology that will play out and there will be some big winners.  It’s just impossible to know which ones today exactly.  That’s why when you invest in crypto, you better have some principles around your investment.

This logic extends to many debates we have in our society today.  Almost all of them have a lot more nuance than people want to carefully consider.  Much easier to think on a linear plane and have a knee jerk reaction.  Much easier to call the other side evil and then actively discriminate against them.  Hot button issues like global warming, guns, and almost any other issue that you might read about are full of confirmation bias.  For me, the closer I can get to understanding costs/opportunity costs and the initial assumptions behind what is really going on gets me closer to what is really going on.

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