When you think of the stock market, what immediately comes to your mind? The quiet compounding of an index fund, the disciplined investor who buys low and sells high, or the cold rationality of efficient markets, where every price is supposed to reflect all the information available? Or perhaps something more dramatic, the image of a trader on a Wall Street floor watching the numbers turn red. But what you probably didn’t think about, unless you read the title, was a flower. So, how did a single tulip bulb in seventeenth century Holland come to cost more than a skilled craftsman could earn in nearly two decades, and why has the same pattern kept repeating itself almost four hundred years later?

At the centre of every speculative bubble sits the same piece of human behaviour: herd behaviour (the tendency for investors to follow the crowd rather than rely on their own independent analysis of what something is actually worth). Once a price starts rising, the fact that it is rising becomes the reason to buy, regardless of the underlying value of the asset. This is reinforced by a handful of other tendencies the human mind reliably falls back on, including the fear of missing out, the assumption that a recent trend will simply continue, and what economists call the greater fool theory (the belief that it does not matter if you overpay, because someone even more foolish will buy it off you later). Put these together and you get a cycle so consistent that it has been documented across centuries, on different continents, with completely different assets. The asset changes. The psychology does not.

The first recorded example, and still the most famous, is the Dutch tulip mania of the 1630s. Tulips had arrived in the Netherlands from the Ottoman Empire and quickly became a status symbol among the wealthy, with the rarest “broken” varieties, streaked with flame-like patterns, the most prized of all. Because the bulbs themselves stayed in the ground for most of the year, traders began buying and selling contracts for bulbs they would never physically see, often in taverns, in a frenzy of daily bidding. By the winter of 1636 to 1637, a single bulb of the celebrated Semper Augustus could change hands for around 5,500 guilders, at a time when a skilled craftsman earned roughly 300 guilders a year. Just to put that in perspective, one flower bulb cost the equivalent of close to eighteen years of wages, or a grand house on one of Amsterdam’s finest canals. Then, at a routine auction in Haarlem in February 1637, buyers simply stopped showing up. With no new buyers to sell to, the liquidity that had propped up the market vanished almost instantly, and prices for the most sought-after bulbs collapsed by as much as 95% within weeks. It is worth adding, since the story is so often exaggerated, that modern historians such as Anne Goldgar have shown the wider economic damage was fairly limited, with relatively few people genuinely ruined. The lasting consequence of tulip mania was therefore less a financial catastrophe than a cautionary tale, the first time a society watched a price detach entirely from any sensible measure of worth.

The same mechanism returned, on a vastly larger scale, in the dot-com bubble of the late 1990s. This time the story investors told themselves was the “new economy”, the idea that the internet had rewritten the rules and that traditional measures of value, such as whether a company actually made a profit, no longer applied. Anchored to that narrative (anchoring being the habit of fixing on one reference point and judging everything against it), the market began rewarding companies for growth in users and attention rather than earnings. The technology-heavy NASDAQ Composite index rose from around 751 points in January 1995 to a peak of 5,048 on 10 March 2000, a gain of close to 580% in five years. The poster child for the excess was Pets.com, an online pet supplies retailer that floated in February 2000 and saw its market capitalisation fall from more than $300 million to zero in under a year. When the euphoria broke, the NASDAQ fell roughly 78% from its peak by October 2002, wiping out more than $5 trillion in market value, and it would not reclaim its March 2000 high until April 2015, fifteen years later. What makes the episode such a clean example of behavioural finance is that the underlying technology was real and transformative, much as the optimists claimed. The prices, driven by overconfidence and the fear of being left behind, were simply far ahead of it.

The most recent, and perhaps strangest, case is GameStop in January 2021, which showed how the same crowd psychology behaves when amplified by social media. GameStop was a struggling video game retailer that hedge funds had bet heavily against, to the point where its short interest stood at around 140% of its available shares (meaning more shares had been sold short than actually existed, because borrowed shares were re-lent and shorted again). A community of retail investors on the Reddit forum r/WallStreetBets, whose membership tripled to around 6.5 million in a single week, coordinated to buy the stock and trigger what is known as a short squeeze (when a rising price forces those who bet against a stock to buy it back to limit their losses, pushing the price even higher). The result was extraordinary: the share price rose from under $20 in early January to an intraday high of $483 on 28 January 2021, a gain of more than 2,700%. The hedge fund Melvin Capital required a $2.75 billion injection from Citadel and Point72 to stay afloat. As you may have guessed, it did not last. After the broker Robinhood restricted buying of the stock on 28 January, the buying pressure broke and the price collapsed back into the $40s within weeks. What was different here was the motive. For many participants the trade was not really about expected profit at all, but about collective identity and a sense of taking on Wall Street, which is exactly why it spread so fast and detached so far from value. The consequences were political as much as financial, prompting United States congressional hearings titled “Game Stopped?” and a wider debate about the gamification of trading apps and the influence of social media on markets.

Even now, the pattern continues, from cryptocurrencies to the recent surge in artificial intelligence stocks, where the same questions about narrative, value and herd behaviour are being asked once again. Financial bubbles are a salient example of how herd behaviour, the search for status and the fear of missing out can pull the price of an asset away from any reasonable estimate of its worth, with consequences that ripple outward from individual savers to hedge funds, regulators and, in the largest cases, the wider economy itself.