In the 17th century, the Netherlands was gripped by a period of economic speculation known as tulip mania. The value of tulip bulbs rapidly increased, with some bulbs selling for more than a house. This led to a bubble, which eventually burst, causing many people to lose their money, but not their tulips.
Tulip mania is just one example of the irrational behaviour that can drive asset prices. In recent years, we have seen similar examples in the recent crash of Non Fungible Tokens (NFTs). NFTs are a gloriously ingenious solution to a non existent need which (I oversimplify slightly) involves paying for a painting and in return getting the rights to the till receipt.
So, what drives asset prices? The rational basis of pricing is the idea that asset prices are determined by scarcity, and that they reflect the intrinsic value of the asset. However, there are many factors that can influence asset prices, including investor psychology, speculation, and government policy.
In fact, when it comes to any asset which does not produce an income (such as artwork, the Royal regalia, or a bottle of vintage wine) I balk at the very concept of an "intrinsic price". When the market is irrational, it pays to be mad (until it doesn't).
This blogpost, which fairy reflects my musings on the subject, was produced in collaboration with Bard AI (in fact Bard came up with the catchy title), and is illustrated by the good (Silicon) folk at DALL-E.
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