Reading Comprehension

PT126 · S2 · P4 · Q27 Speculative Bubble and Tulip Prices

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In economics, the term "speculative bubble" refers to a large upward move in an asset's price driven not by the asset's fundamentals—that is, by the earnings derivable from the asset—but rather by mere speculation that someone else will be willing to pay a higher price for it.

Topic

Whether the tulip market is an example of a speculative bubble

Framework

Challenge a Position

Position - Mackay believes that he Dutch tulip market is an example, since the price of some bulbs skyrocketed suddenly and ultimately fell to a tiny, tiny fraction of that peak perceived value.

Challenge - Garber is saying that even though there was a rapid escalation in price followed by a dramatic decline, that's actually just how the true economic cycle of tulip bulbs work (early ones are so much more valuable than later ones, that it's normal and rational, i.e. based on the fundamental value of the asset, that prices soared and then declined as they did.

Main Point

Barber thinks that the depiction of the Dutch tulip market, by Mackay and others, as a speculative bubble is wrong.

Summary

P1 - Definition of Speculative Bubble, followed by the Position and the Challenge.

The first few ideas are just warming us up to what speculative bubbles are. Then we zoom in on one specific situation, which is often though to be an example of a speculative bubble. The transition from "According to X ..." to "But the economist Y challenges this position" looks like our Purpose Pivot in the final sentence of the first paragraph, suggesting that Garber's challenge is going to be the main point of the passage.

P2 - The Position being Challenged

This paragraph outlines Mackay's account of how the Dutch tulip market behaved liked the definition of a speculative bubble.

P3 - The Challenge to the Position

This paragraph covers Garber's rebuttal, saying that the typical value pattern for tulip bulbs may resemble a speculative bubble, but it is actually just a symptom of correct, rational economic thinking about the value of a tulip bulb at different stages in time. The author doesn't really show up in this passage. Because Garber is given the last word, we can assume our author is sympathetic to this rebuttal or implicitly agreeing with it, but we would mainly think of this as a neutral passage.

27.

The phrase "standard pricing pattern" as used in the third sentence of the last paragraph most nearly means a pricing pattern

  1. against which other pricing patterns

    Not a Metric

    This is thinking we're saying "Lebron James is the standard for how super famous athletes should behave in order to be role models", as in, we'll compare others to the standard he's set. That's not at all what we're saying. We're just saying tulips have a pretty standardized value curve -- initially they're worth a lot, but later they're worth way less.

    4% picked this

  2. that conforms to a commonly

    Not a Convention

    This is thinking we're saying "Sir, we have certain standards at this tennis club. Your leather jacket has no place on our Centre Court!" There is a pattern to tulips being priced very high at first and low later, not because it's a commonly agreed-upon convention, but because that is how the market correctly assesses the value of the tulip bulb at different points in time.

    20% picked this

  3. that is merely acceptable

    Not a Mediocre Review

    This is thinking we're saying "How was that rom-com you just watched?", "Eh, pretty standard. Glad I didn't pay money to see it in a theater, but good enough for a lazy night at home." We're not saying that the pricing pattern for tulips is acceptable, but not particularly good.

    2% picked this

  4. Correct

    that regularly recurs in certain

    Why this is right

    Garber is saying it's normal / typical / standard for new tulip bulbs to be priced very high and then later to have a very low price. It's a pattern that regularly recurs within the world of buying/selling tulip bulbs.

    Skill tested: Meaning in Context · how this choice captures the passage's function is the move to repeat next time.

    70% picked this

  5. that serves as an exemplar

    Not an Example

    This is basically like choice (A). This is thinking we're saying "Lebron James is the standard-bearer, the exemplar for how super famous athletes should behave in order to be role models", as in, we'll compare others to the standard/example he's set. That's not at all what we're saying. We're just saying tulips have a pretty standardized value curve -- initially they're worth a lot, but later they're worth way less.

    3% picked this

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