Speculative Bubble and Tulip Prices

Answer choices

1. A

   Too Strong: very rarely1% picked this

   If speculative bubbles occur at all, they occur

   Garber is only saying that the Dutch tulip situation isn't an example of a speculative bubble. He's not saying that speculative bubbles almost never occur.

   1%
2. B

   Correct62% picked this

   Many of the owners of high-priced original tulip bulbs could have expected to at least recoup their original investments from sales of the many

   Why this is right

   This answer is essentially saying that Garber would have defended the people who bought these tulip bulbs at their original high-price. They weren't just being suckered by the hype of some 'bubble'. They were correctly analyzing the value of a tulip bulb. This is supported by Garber saying "this episode should not be described as a speculative bubble, for the eventual decline in bulb prices can be explained in terms of the fundamentals." And then at the end of the 3rd paragraph, Garber is saying "this does not mean that the high prices of original bulbs are irrational, for earnings derivable from the millions of bulbs descendent from the original bulbs can be very high ... given that an original bulb can generate a reasonable return on investment ..."

   Skill tested: Non-Author Opinion · how this choice captures the passage's function is the move to repeat next time.

   62%
3. C

   Reversal8% picked this

   If there is not a speculative bubble in a market, then the level of prices in that

   Garber is thinking, Since buying an original tulip bulb at a crazy high price is not irrational (you could reasonably expect to make that money back), this was not a speculative bubble. High prices ? Not a speculative not irrational bubble But this answer gives us the reversed logic version of that: Not a speculative ? prices were not bubble irrational

   8%
4. D

   Too Strong: most / all5% picked this

   Most people who invested in Dutch tulip bulbs in the seventeenth century were generally rational

   Garber is only saying that the investment in an original tulip bulb, despite its high price, was rational given the earnings derivable from the millions of bulbs descendant from the original. He isn't vouching for all the investment decisions made by at least 51% of the people who invested in Dutch tulip bulbs.

   5%
5. E

   Wrong Mistake23% picked this

   Mackay mistakenly infers from the fact that tulip prices dropped rapidly that the very low prices that the bulbs

   Garber is trying to argue that exorbitantly high prices of the original bulbs were not irrational. No one was arguing that the low prices were irrational. A speculative bubble is when the prices being paid for something go way beyond the actual value of that thing (like Gamestop stock, or bitcoin, or dogecoin, or real estate prior to the 2008 market crash, etc.) Mackay thought the Dutch tulip situation was a bubble where prices ballooned to artificially high prices before eventually settling back down to the low prices they should have had (the rational prices).

   23%