n November 1636, the prices of tulip bulbs in the Dutch market rose rapidly from their normal level to the point where a single bulb might sell for 10 times the annual earnings of a typical worker. Just as quickly, in May 1637, tulip-bulb prices returned to their previous values. The causes of this dramatic rise and fall remain in dispute. The event occurred during the Dutch Golden Age, when stock exchanges, central banking, and many of the fundamental structures that govern contemporary capital markets and the approaches deployed by MBAs today were developed.
One modern economic analysis suggests that the precipitous decline in tulip-bulb prices resulted from a February 1637 change in the way that futures contracts were enforced, which immediately reduced the value of those contracts by 97%,1 but this analysis doesn't explain why the prices had shot up in the first place. Clearly, tulipmania was a bubble market fueled by speculation rather than intrinsic valuation. After all, why would people be willing to pay 10 times the average annual wage for a single tulip bulb unless they were confident that they could sell it to an even greater fool willing to pay even more?
Bubble markets are created when an asset trades for increasingly higher prices as it is bought by people who are hopeful about its future value and then sold to others with even more optimistic views of that value. Recent examples include the U.S. housing bubble, in which home prices rapidly rose until 2007 and then just as rapidly fell, and the dot-com bubble, in which prices of Internet stocks rose until 2000 and then plummeted. Bubbles burst when some new sense of lower intrinsic value appears. The last buyers are stuck with something they paid too much for and can no longer unload. It's like being caught without a chair when the music stops, but whereas even the losers at musical chairs knew that at some point someone would be left standing, bubble markets are usually recognized only in retrospect — the losers never saw it coming.
Are we in a bubble market in medical education? In medicine, students buy their education from medical schools and residency programs (which pay wages that are lower than the value of the work that residents provide in return). This education is transformed into skills and credentials that are then sold to patients in the form of services. So long as it is believed that patients, or whoever purchases health care on their behalf, will keep paying more and more for physicians' services, students and trainees should be willing to pay more and more for the education that enables them to sell those services.
One modern economic analysis suggests that the precipitous decline in tulip-bulb prices resulted from a February 1637 change in the way that futures contracts were enforced, which immediately reduced the value of those contracts by 97%,1 but this analysis doesn't explain why the prices had shot up in the first place. Clearly, tulipmania was a bubble market fueled by speculation rather than intrinsic valuation. After all, why would people be willing to pay 10 times the average annual wage for a single tulip bulb unless they were confident that they could sell it to an even greater fool willing to pay even more?
Bubble markets are created when an asset trades for increasingly higher prices as it is bought by people who are hopeful about its future value and then sold to others with even more optimistic views of that value. Recent examples include the U.S. housing bubble, in which home prices rapidly rose until 2007 and then just as rapidly fell, and the dot-com bubble, in which prices of Internet stocks rose until 2000 and then plummeted. Bubbles burst when some new sense of lower intrinsic value appears. The last buyers are stuck with something they paid too much for and can no longer unload. It's like being caught without a chair when the music stops, but whereas even the losers at musical chairs knew that at some point someone would be left standing, bubble markets are usually recognized only in retrospect — the losers never saw it coming.
Are we in a bubble market in medical education? In medicine, students buy their education from medical schools and residency programs (which pay wages that are lower than the value of the work that residents provide in return). This education is transformed into skills and credentials that are then sold to patients in the form of services. So long as it is believed that patients, or whoever purchases health care on their behalf, will keep paying more and more for physicians' services, students and trainees should be willing to pay more and more for the education that enables them to sell those services.
