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Behavioural Finance Viev On Market Bubbles - Essay Example

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Market Bubbles In financial and accounting practices, the terms market bubbles and behavioral view are not new since the introduction of rational expectations regarding economic models. A market bubble in economics refers to a sharp abnormal rise in the market price of a commodity or a set of commodities consistently, with the initial increase in the prices generating expectations on future rises, thus, attracting speculators whose interest lies in the trading profitability of such commodities rather than their earning capacity…
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Behavioural Finance Viev On Market Bubbles
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Download file to see previous pages This paper investigates these market events through relevant research material and identifies the anatomy and behavioral finance phenomena of the events using information. The tulip bulbs speculation, which was at its peak in February 1637, and the consequent market crash that followed mark the most notorious economic hard times in the History of Dutch (Goldgar, 2007:5). Together with Britain’s Sothern Sea Buble in the 18th century, these are the earliest example of irrational market behavior that affected investors in Europe. The Semper Augustus, a tulip bulb type, was both sublime and prosaic than any comparable bonds or stocks, it was extraordinarily beautiful with its pure white top and midnight petals combined with accents of crimsons flares. In history, it remains the most valuable flower to date. Back in the early 1624, an individual in Amsterdam in possession of the last dozen specimens of tulips was o be given a high of 3,000 guilders, an equivalent of a wealthy merchant’s annual income, but turned down the offer. This is the height of how speculations had raised the prices of the tulip. Nonetheless, the tulip craze was not only in Dutch. The flower was an enchantment for the rulers of the Ottoman Empire and the Persians in late 1550s, but it was in Holland where the flower found its fertile ground, economically (Goldgar, 2007:15). Holland was in the Golden Age in the early 1700s and all the resources that the country had directed towards the fight with Spain for their independence were now concentrated on commerce. Amsterdam was strategically at center of the East Indies trade, which enabled a single voyage to gain four times its value in the lucrative market place. Flower gardens surrounding their grand estates usually evidenced their success in the trade. This was the trigger for the tulip craze. Tulip prices began rising significantly as the rich lot in Holland not considering the value of the tulips. The tulip business became the new order of business setting by professional tulip traders with the customers coming from tulip fanciers (bloemisten) in middling groups rather than the nobles or artisans. The enthusiasm of owning prized specimens of tulips was a cultural credential display. The cultural credential associated with the tulips, combined with the fact that the seed takes seven years to grow, and that a mother bulb can only last a few years, was the foundation of the supply crisis. There were many buyers for the bulbs with a limited supply, which in economics results to a rise in the price of the commodity (Goldgar, 2007:86). The prices of the bulbs rose consistently over the early 1930s because of more speculation. The farmers and traders mortgaged all their assets in order to raise more capital for the trade. By 1936, any tulip bulbs, even the ones the current society considers garbage, could simply trade for hundreds of guilders. The peak of the tulip mania was in the early 1937 when a single tulip bulb could change hands up to a maximum of ten individuals in a single day. The exact all time high of the tulip trade was at an auction whose proceeds would benefit seven orphans who had inherited 70 tulips from their father. ...Download file to see next pagesRead More
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