Trying to understand the madness of the masses

Published in the San Diego Union-Tribune, Monday, September 25, 2017

Tulip mania hit its peak in 1637 when a box of 40 bulbs sold for 100,000 florins or the equivalent today of approximately one million euros. Seeds from tulip bulbs flower after seven to 12 years, but when they die, the buds become bulbs of their own, and so the process can go on forever. During the tulip mania, many people bought and sold bulbs that they never took possession of; in other words, this was the beginning of the speculative “futures market.” They bought bulbs at one price hoping to sell to some other “investor” at a higher price, which sounds a bit like our current stock market.

Tulip mania was popularized by a Scottish journalist, Charles Mackay, who wrote a book in 1841, “Extraordinary Popular Delusions and the Madness of Crowds.” Unfortunately, the story of the tulip madness turns out to be mostly untrue. In 2007, Anne Goldgar did research that mostly debunks the myth and argues that tulip mania was mostly practiced by a very small group of merchants (it has been called a “meaningless winter drinking game”), and that the economic fallout was quite limited.

However, the economic theories that have used the tulip as its basis are legion — efficient market hypothesis, the dot-com bubble, and the subprime mortgage crisis being a few. The reason I bring this hoary tale up is that I am fascinated by the wisdom (or lack thereof) of crowds and how hard it is to “pick a winner.”

The latest big idea to change the world that has completely tanked is Juicero. It went out of business last week. Now, lots of companies go out of business, but this one was fantastic. Juicero made a $700 juicer that worked on Wi-Fi, delivering very small glasses of cold pressed juice to you in the comfort of your own kitchen. It had raised $120 million. The investors included Google Ventures, Kleiner Perkins, as well as the Campbell Soup Company. The idea was just like Nespresso or Keurig. You buy the machine, and then you buy little packets of organic juice for between $4 and $10.

Doug Evans, the founder and CEO, said “You extract the water molecules, the chlorophyll, the anthocyanin and the flavonoids, and you are getting this living nutrition. It’s like drinking the nectar of the earth.” Gimme a break — $120 million for some juice.

My suspicion is that this product was solving a problem that did not really exist, and the market for this gizmo was going to be limited to two residential streets in Palo Alto and one in Beverly Hills.

Yet really smart people made the bet to back this company. The famous line is “it seemed like a good idea at the time,” but after the fact, the insanity is obvious. The latest tulip idea pitched to me last week was to use cryptocurrency to take a nonexistent company public.

Everyone knows about bitcoin (even if you can’t explain it and can’t touch it, you can use it to buy a Tesla), but this latest digital asset is even more exotic. I am not going to try to explain it (why should I demonstrate my technical inadequacy?); I am simply going to marvel at the wisdom of crowds and the unlimited ability of the human mind to invent and create.

The word “crypto” has the same talismanic magical sound like “plastics” (from the movie “The Graduate”), and to prove it, a new company Brave, founded by Brendan Eich, of Mozilla fame, raised $35 million dollars in 30 seconds in what is called an “initial coin offering.” The payment system uses “Basic Attention Tokens.” I am not making this stuff up. The investors did not get equity in the company, they got tokens that can be converted into a cryptocurrency called “Ethereum.”

They should try to use those tokens in the New York subway system and see if they can get to Queens on the D train.

I must sound like a troglodyte. Technical innovations are coming, and even if you can’t understand the concept of electricity in a non-zero force field, you still need to flip the light switch on the wall if you want to see where you are going.

Rule No. 530: Make mine orange juice – squeezed from an orange.


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