Decoding the Global History of the Texas Longhorn

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Tulip Mania in the Dutch Golden Age

It is strange to think that something as beautiful and simple as a flower could have led to the world’s first financial bubble.  In the 1630s, the Netherlands is exactly where this happened.  For several years the prices of tulips had been speculated and driven up to prices that were previously unimaginable.  When this tulip bubble popped, traders, merchants, and craftsmen saw their entire life savings wiped away as the prices of tulips fell at an alarming rate.  The effects of the burst of the tulip bubble had dramatic effects on the Dutch economy and drove the entire country into a mild depression.  In recent years, we saw the burst of the housing bubble which led to millions of Americans losing their home and the eventual fall of Lehman Brothers.  Though centuries apart, there are many similarities between the burst of the 1636 Dutch tulip bubble and the 2007-2009 American housing bubble. 

The 17^th century saw the rise of the “Dutch Golden Age” when the city of Amsterdam was one of the richest of all cities in Western Europe due to its strong international trade.  With the booming economy, Dutch trade with foreign countries led to the importation of many foreign goods that had not been seen before in the Netherlands.  As the importation of exotic goods continued on, Tulips were introduced into the Netherlands and the ability of these flowers to withstand the harsh northern-European climate, along with their unique beauty, made them a status symbol in gardens across the Europe. 

During the spring months, tulips bloomed for about one week, with the bulbs appearing during late summer and early fall, thus confining Dutch sales to that season.  As sales and trades for the tulip bulbs began to rise, a type of derivatives market was formed so buyers and sellers could conduct trades year round.  This rudimentary derivatives market had contracts that were very similar to modern options, forwards, and futures contracts.  Like a modern futures contract, buyers and sellers would come together and decide on an appropriate price for the tulips in the upcoming year, then sign a contract for delivery on a specific date, at a specific price. 

The tulip bulb contracts traded daily amongst the Dutch became an important attribute to the Dutch economy and their prices quickly began to rise as popularity grew.  Craftsmen and merchants were selling everything they owned and gathering their life savings to purchase tulip bulbs because they saw how successful their neighbors were becoming at “flipping” the tulip bulbs.  In a matter of a few years, the prices of these bulbs went from being worth as much as an onion, to being ten times a craftsman’s annual income by the end of 1636. The Dutch Golden Age was at its peak and Tulip Mania was now the driving force behind this thriving economy. 

Winter of 1636, a few defaults on tulip bulb contracts led to a domino effect and the tulip bulb bubble popped as supply exceeded demand.  Sellers were overwhelming the market while buyers suddenly disappeared.  Within a few days, the tulip bulbs were worth a small fraction of what they once were.  Many dealers refused to honor the contracts and looked towards the government for intervention.  The government eventually stepped in and attempted to aid the tulip bulb meltdown by offering 10% of the contracts face value to the dealers.

The popping of the tulip bulb bubble ended the Dutch Golden Era and had lasting effects on the country.  In retrospect, you would think that over the course of Tulip Mania someone would have said, “Look, these bulbs are grossly overvalued and this needs to stop.”  However, through the speculation and large profits, dealers were blind to what was really going on and ended up with catastrophic losses.  Bubbles like this again show their faces throughout history, most recently, with the housing bubble and credit crisis from 2007-09. 

Following the tech bubble and recession of the early 2000s, the Federal Reserve began to lower interest rates in an effort to increase the flow of capital. As money fled the stock market, it began to spread into other sectors of the economy. Real estate was the preference of many investors, because of cheap money (low interest rates) and government intervention that artificially increased the demand for housing. Government sponsored lenders Fannie Mae and Freddie Mac  began to lower their underwriting standards so that Americans who could not previously own a luxurious home, could now borrow money for a home in which they did not have the means to afford.  As lenders became more lenient, demand for homes began to rise, and just as the prices for tulip bulbs rose following the demand in Tulip Mania, the prices of homes rose following the strong demand for housing.

When prices for bulbs in Tulip Mania increased, investors sought to speculate on the prices which further caused the prices to spike.  In a similar manner, during the housing bubble, home prices rose and financial institutions packaged together securities that contained these risky loans and sold them on Wall Street creating a market for the speculation of risky mortgages.  The housing bubble popped in a similar manner as the tulip bulb bubble did when people could no longer afford their risky loans they had taken out.  Investors thought that home prices would keep rising and once they stopped, they attempted to dump their worthless securities on the market and caused mayhem in the financial industry.  The home prices were speculated beyond their value and eventually plunged leading to a recession that lasted until 2009.

Though the assets being exchanged and speculated on in the Tulip Mania and housing bubble were completely different, it is not hard to see that both were driven by speculative frenzies and it only took a few defaults to expose and deflate the bubbles.  

Nudges and Libertarian Paternalism

Conservative economists have long stressed that since people are rational, the best thing a government can do is to guarantee a fair market and to otherwise get out of the way. However, in the real world, scholars claim that people are subject to all sorts of biases and quirks. In the book Nudge, authors Cass Sunstein and Richard Thaler introduce a concept called “libertarian paternalism” as a way to preserve liberty. Their claim is that libertarian paternalists want to make it easy for people to go their own way without burdening those who want to exercise their freedom. Skeptics of this philosophy, such as Bill Dyer, argue that libertarian paternalism is just another way for the government to manipulate you to do something that they want you to do in such a subtle manner that you might even think it was your own idea. Is libertarian paternalism a legitimate way of “nudging” people to make the right choice? Or is it simply a way for government to push their own interests onto the public? Let us look at both arguments.

According to a study of residents of Iowa, 97% said that they supported organ donation. However, out of those who supported organ donation, only 43% had the box checked on their driver’s license. It appears that either respondents lied about how they felt, or there is something that is deterring them from registering to donate. Many libertarian paternalists feel that the latter is true because under current Iowa law, all citizens are born under the default option of not being an organ donor. If a citizen decides that he or she wants to be an organ donor, certain steps have to be taken before they are qualified.

A libertarian paternalistic view on how to increase the number of organ donors is the application of presumed consent. Under this policy, people are to be presumed as consenting donors but with the option to opt out if they choose so. Personally, I feel as if it is a great way to apply how people feel without making it too difficult for them. The statistics out of Iowa show that the majority of respondents feel strongly about organ donation but fail to act upon it. This policy is the essence of libertarian paternalism in that it allows people to “go their own way” without burdening those who want to exercise their freedom.

Many people object to the policy of presumed consent because the idea of “presuming” anything gives them the impression that they are being forced into organ donation. I agree with these skeptics in that sometimes it is hard to see the difference between guiding a person’s choices and manipulating them. This leads to the key problem that those who are trying to push the “nudge” style policy onto the public assume they understand what people want better than the people themselves. I know this is untrue because policy makers are susceptible to the same biases as the rest of the public. The bias in particular I am talking about is overconfidence.

Sunstein did a study where he asked new business owners two questions: (a) What do you think is the chance of success for a typical business like yours? (b) What is your chance of success? The most common answers that he received were 50% and 90%, respectively, and many said 100% to the second question. Respondents knew the difficulties of running a successful business in the long run (hence the 50% chance of success), but when asked about their own chances of success, they seemed to skew the probability in their favor.

In the same way that the business owners were overly optimistic about their business prospects, it’s possible that the policy makers are too at times overly optimistic and overconfident in their abilities to project what they believe to be the “right” decision onto the general public.

In the case of organ donation, Sunstein and Thaler support the idea of mandated choice; this policy would require drivers renewing their license to have to choose whether or not to be an organ donor. They feel that rather than having to settle for the default option of not being an organ donor, the simple act of having to choose will nudge Americans in the direction of becoming one.

I agree with Sunstein and Thaler in that people should be displayed their options, make their choice, and not have to go through long, tedious measures to opt in or out of their preference like they would see in a policy that involves a default option.

Again, like I previously stated, it is very possible that policy makers who support libertarian paternalism are incorrect in their projections onto the public, however, at the same time, I sense a little bit of paranoia coming from the anti-paternalists.

A common misconception is that paternalism always involves coercion. People, for the most part, don’t like to feel as if they are being forced to do anything. These people oppose paternalism, or at least think they do, and they feel threatened by nudges. Sunstein and Thaler believe that the anti-paternalist skepticism is based on the false assumption that almost all people, almost all of the time, make choices that are in their best interest or at the very least better than the choices that would be made by someone else, especially the government.

Many people worry that governments cannot be trusted to be competent or beneficent and this is where I believe the paranoia stems from. Indeed, in US economic history, there at times have been conflicts of interests between policy makers and the people they represent. I believe that people use their availability bias to overemphasize the frequency of these conflicts of interest, therefore causing them to oppose any type of nudge from the government.

It’s possible that the skepticism that people feel towards government can be deterred by making public the underlying reasons why policy makers support certain policies. Sunstein and Thaler feel this could be done by requiring government officials to put all their votes and contributions on their Web sites. I believe that doing so would educate the public on how they would benefit from certain policy changes, and if they aren’t the ones benefiting, then this could possibly give them an insight on who is.

The policies involving libertarian paternalism can be viewed as either harmless nudges or full-fledged shoves, depending on the context. Critics of the policy feel the need to question the intentions of the policy makers, while those who praise it see no harm in guiding people to make the best choice (in their opinion). Ultimately, I feel there is no harm done in libertarian paternalistic policies because those who agree with the policy can easily go along with it, and those who oppose, can easily seek other options if they feel strongly enough.

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Retail Exclusivity and Brand Marketing

Polo Ralph Lauren is a luxury retail brand that designs and markets men’s and women’s clothing, accessories, and home furnishings. Their collared shirts and shorts are the poster-style of clothing choice for many fraternities here at the University of Texas at Austin. I am not a part of a fraternity but I do, on occasion, wear luxury retail brands. Wal-Mart and Target have been known to sell clothing that is very similar to the clothing that luxury brands sell, however, without the beloved logo. Has American materialism gotten so bad that we’d rather pay $100 for a shirt with a logo rather than pay $15 for almost the exact same shirt, without the logo? Mark Twain once noted about Tom Sawyer, “Tom had discovered a great law of human action, namely, that in order to make a man covet a thing, it is only necessary to make the thing difficult to attain." Is the exclusivity and difficulty to obtain certain retail items the reason us Americans buy these products? I am going to dig down and explore what exactly has driven us to purchase luxury and overpriced products.

During the 1970s, an Italian diamond dealer, Salvador Assael, and a Frenchman, Jean-Claude Brouillet went into the black pearl business . Assael’s initial marketing efforts failed because of the lack of demand for black pearls. However, rather than lowering the prices for the pearls, he took them to an old friend, Harry Winston, the legendary gemstone dealer. Winston then put them in the window of his store on Fifth Avenue, with an extremely high price tag. Assael topped off this new marketing plan with a full page advertisement that ran in some of the more upscale magazines. The black pearls eventually made it throughout Manhattan, hanging around the necks of the city’s elite.

How was Assael able to persuade the people of Manhattan that these black pearls were now luxurious and fashionable? First, we shall look into the anchoring effect and how it affects the way we purchase things.

The anchoring effect occurs when people consider a particular value for an unknown quantity before estimating that quantity. It all stems from the idea of imprinting; that is, we are initially imprinted to a certain price or exclusivity, and from then on we are anchored to that specific price or exclusiveness. In the case of Assael, he anchored his pearls to the finest gems in the world (with the large price tag), and then the prices followed forever after. The full-page advertisements in the upscale magazines were enough to convince the people of Manhattan that the black pearls were exclusive; they were then anchored to this exclusivity and the price tag then felt appropriate.

This idea of anchoring is what happens to us when we buy luxury retail; we assume that the price tag is appropriate for the product and we are imprinted with it. Many people are guilty of buying into companies exaggerating marketing schemes and don’t even know it. An appropriate quote would be this one from Daniel Kahneman,” You are always aware of the anchor and may even pay attention to it, but you do not know how it guides and constrains your thinking, because you cannot imagine how you would have thought if the anchor had been different."

There’s a cornucopia of brands and products that are marketed in such a way that is meant to display a type of exclusivity. Modern brands such as Apple, Polo Ralph Lauren, Louis Vuitton, and Mercedes are the first that come to mind; but companies have been using this type of marketing scheme for centuries.

In the eighteenth century, a man by the name of Josiah Wedgwood began selling luxurious pottery in Great Britain. Wedgwood understood that in the emerging consumer society, marketing was as important as manufacturing. He was an innovator who sought a new way of creating and sustaining customer loyalty by building his brand systematically. Seeking exclusivity by using brand marketing had been unheard of up to this point. In the latter part of the eighteenth century, he began impressing his own name in the unfired clay; now every piece advertised the Wedgwood name.

The Industrial Revolution brought many new manufacturing processes and the working class now had more money to spend on luxury goods. Wedgwood understood that much of the spending was the result of social emulation. The term ‘social emulation’ describes the idea that whenever people buy something in a manner to attract attention; they do it to keep up with their peers.[1] This concept is basically ‘keeping up with the Joneses.’ Eighteenth century Britons were much like modern consumers in that they spent like the rich did even though the Industrial Revolution did not distribute this income equally. Middle-class Britons aspired to be like the rich and their aspirations went into the luxury retail they bought.

Another tactic that Wedgwood used to market his brand was celebrity endorsements; a tactic that is constantly used by modern companies. He had traveling salesmen carry samples of goods endorsed by aristocrats along with a sales manual with specific marketing guidelines. Even with prices that were well above the industry average, he continued to generate high revenue.

Modern day advertisements are smothered with our favorite celebrities and athletes endorsing all varieties of products. When selecting a celebrity endorser, a company might consider the physical appearance, intellectual capabilities, lifestyle, and compatibility between the brand and celebrity. Many people thrive to find some way to relate to these celebrities; even if it means spending more money than they should.

With the advances in social media, it is now easier than ever for companies to market their brand using celebrity endorsements. Images of our favorite superstars endorsing products are all over Twitter, Facebook, and many other social media sites.

Tom Sawyer had consumers all figured out more than a century ago. For hundreds of years, our favorite companies have used price anchors, brand exclusivity, and celebrity endorsements to get consumers to stray away from rationality; which ultimately leads them to pull a little more money out of their wallet than they would have if they were behaving rationally. The underlying agenda of these marketing schemes has been to convince consumers to purchase products that they might not have wanted if such anchors or advertisements had been different (or not have existed).


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[1] Katie Whitford, Conspicuous Consumption, Social Emulation and the Consumer Revolution (http://newhistories.group.shef.ac.uk/wordpress/wordpress/?p=1338), 1/24/13.

Old Mark Cuban blog

This is an interesting read from the world's greatest NBA franchise owner (of course, this is subjective).  Mark Cuban, the owner of the Dallas Mavericks, posted this old blog from 2004 on Twitter.

Mark Cuban discusses how he came to realize that markets were inefficient after selling his company Microsolutions in 1990.  Immediately after selling his company, he became aware that he could profit from his inside information about technology. 

For the next few years Cuban profited from a few other business expenditures and eventually bought a majority stake of the Dallas Mavericks. 

Read blog post now!

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