At the end of the 20th century, in the late 1970s, a company named Dakin was a leader in the global plush toy market, selling nearly 70 million toys annually. Ty Warner was the company's top salesman.

Warner had a keen intuition for plush toys, and during his time at Dakin, he began to privately create his own series of toys. When his bosses discovered this, he was fired.

Subsequently, Ty opened a toy company named after himself, Ty, and launched the Himalayan cat series of plush toys. These toys had dense fur, a light texture, and were filled with "beans" in their buttocks and feet, allowing the plush toys to be posed in various positions.

This was a very significant innovation at the time. Warner said in an interview: "No one had combined beans with under-stuffed plush toys; all plush toys were very stiff."

The plush toys created by Warner were different from others; they could be freely positioned and could perform actions such as "waving, dancing, and hugging."

These types of toys were collectively called Beanie Babies—a limited edition of $5 plush toys manufactured by Ty that sparked a craze in the latter half of the 1990s. People (mainly adults) would spend thousands of dollars to collect them. At this point, Beanie Babies were more than just toys; they were like financial investment products.

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Beanie Babies once accounted for 10% of all sales on eBay. eBay's CEO Meg Whitman once stated that a significant part of eBay's valuation at the time of its IPO was supported by Beanie Babies.

The average price of Beanie Babies on eBay was $30, six times their retail price, and some rarer items were even sold for six figures. As a result, plush toys in toy stores were snapped up by gold rushers.

Ty became the world's largest toy company in just three years, and Warner became the 877th richest person in the world at the time. Similarly, within just a few years, these plush toys almost became worthless.The Beanie baby craze rose and fell rapidly, earning it the moniker of "the strangest speculative frenzy ever." The fervor involved fights, fraud, trampling, smuggling, robbery, divorce disputes, and even murder, making its madness akin to the 20th-century American version of "Tulip Mania."

The Genesis of the Beanie Baby Bubble

Manipulating supply and demand to create scarcity

It is evident that the Beanie baby craze was an economic bubble, driven by frenzied speculation and unfounded optimism, with the fundamental economic factor being the manipulation of supply and demand.

1) The creator of Beanie babies, Warner, made innovative changes to plush toys, making them appear more novel among other plush toys in the market.

2) Warner refused to supply large quantities to big retailers, opting instead to sell small batches of new Beanie baby models to independent businesses and pricing each toy at $5.

3) Each plush toy introduced by Warner was a limited edition, discontinued shortly after its release, with new models continually being introduced.

This scarcity marketing strategy led to near-frenzied buying sprees with each new Beanie baby release. Fans would rush to local stores, forming long lines outside before the new toys arrived, as missing out meant they would be gone forever. This also incentivized "collectors" to pay thousands of dollars for a plush toy that initially retailed for $5.

Exploiting information asymmetry for speculation, arbitrary pricing

Entering the internet age, the establishment of eBay pushed the already heating Beanie baby craze to new heights.At the same time, Ty also posted toy retirement announcements on the company's website, hinting at potential retirements, which tempted people to buy and sell different product lines. Consequently, some sellers began to adjust their prices all day long based on the website's updates. There were also individuals who placed advertisements in magazines offering price lists, yet they were essentially setting prices arbitrarily without any foundation.

Expert Rationalization

To attract new buyers and keep prices inflating, it was often necessary for experts to endorse the market, explaining why it was still profitable to buy in at current prices. Experts who had profited from Beanie babies in the early days, staff from plush toy-related magazines, and dealers were all working to soothe the public's panic, convincing them that the market was on an upward trajectory and would continue to rise.

Bubble Burst

The first sign of the Beanie baby craze's decline appeared in January 1999.

At that time, after Ty announced a series of product retirements, the prices remained relatively stable. This was the first time since the start of the trend that prices did not soar due to product retirements.

On the same day, Ty also announced the launch of 24 new Beanie babies, which was the real beginning. The release of new products overwhelmed buyers. Wholesale shipments decreased by 20% compared to the previous year, and Beanie babies were being sold at flea markets for $3, with supply exceeding demand. The once scarce retired products were now readily available on store shelves.

By early 2000, the latest retired Beanie baby series was being sold for $10, and by later that year, these toys were found in discount retail stores across the country. Many people suffered significant financial losses as a result.

In the years that followed, Ty's sales dropped by more than 90%. In 2004, Warner revealed that he had lost over $39 million.

It is noteworthy that the Beanie baby speculation occurred during the dot-com bubble, indicating that the alchemy of internet stock culture had a similar impact on Beanie babies.Nobel Prize-winning economist Robert Shiller wrote in "Irrational Exuberance": "The expansion of speculative markets is often related to the popular belief that the future is brighter or more uncertain than the past."

The period from 1999 to 2000 was so rosy that everything seemed possible. At that time, some people believed that the internet would change everything, and everyone who bought internet stocks would become rich overnight. Others, driven by this optimism, believed in the investment value and potential of plush toys.

Beanie babies were not just a fashion statement at the time; they were a craze, an obsession that not only bewildered gullible children but also adults who completely lost their sense of reason when it came to these plush toys.

People were trading some rare Beanie babies at prices of $5,000 each, expecting their value to skyrocket within a decade. Collectors carefully attached the tags of each toy and protected them in plastic cases; because once the tag was removed, its value would be halved.

As for why people lost their minds over plush toys, in the book "The Great Beanie Baby Bubble," the author Bissonnette hypothesized, citing Freud's views. The book suggests that collecting Beanie babies "reflects a return to the comfort and consolation provided by childhood objects," and acquiring a rare and valuable item activates people's endorphins.

Two other economics professors with psychoanalytic training, David Tuckett and Richard Taffler, have specifically studied the dot-com bubble, but their theories apply to all modern bubbles.

According to them, humans occasionally regard exciting new creations as "phantasms," which overwhelmingly distort people's rationality. As a result, the brain begins to generate a suggestion that by acquiring these "magical" items, people will gain some profound sense of satisfaction. The thrill of the chase obscures the ability to rationally assess the actual value of the items, and as others conform to the same phantasm, it reinforces the suspension of logic.

Tuckett and Taffler's theory is primarily based on the famous bubble theory of economist Charles P. Kindleberger.

According to Kindleberger, every bubble has four basic stages:2) The "euphoria" regarding this development;

3) The sudden "prosperity" of sales and speculation;

4) The panic when the bubble bursts.

Building upon Kindleberger's model, Tuckett and Taffler introduced an additional phase of "revulsion" to describe the collective epiphany of the masses upon realizing their investment in junk.

Mathematician and bubble expert Andrew Odlyzko, in his study of the British railway mania of the 1840s, proposed a simpler theory to explain speculative panics. Odlyzko attributed part of the railway mania to a "collective hallucination," which is an extreme form of groupthink where a significant portion of people fervently believe in a shared dream, disregarding the opinions of skeptics and detractors.

The existence of groupthink has been confirmed in numerous studies, and Odlyzko's theory extends this concept to economic bubbles. According to his analysis, initially, Beanie baby collectors formed an insider group, sharing secrets about the value of Beanie babies. As more people discovered these toys, they were eager to learn the secret and share in the wealth that the Beanie baby market was about to bring.

Soon, millions of Americans were enveloped in a belief that they had found a shortcut to personal wealth. Due to the collective hallucination about the value of Beanie babies, people failed to realize that the only factor driving the Beanie baby market was their own firm conviction that these toys were valuable.Apparently, the Beanie Baby bubble is not an isolated case; similar incidents have always occurred, only the objects of speculation and the scope of impact are different.