Free exchange – The prices of sports cards and odd collectibles are booming, too | Finance & economics

on Feb25
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THE S&P 500 may be setting new highs, but to really take the measure of market exuberance look no further than Nyan Cat. The animated meme, encoded cryptographically into what is known as a “non-fungible token” (and which is unique and distinct from unencrypted versions of the animation that can be found with a quick internet search), was recently sold at auction for nearly $600,000. Other odd collectibles are booming too. Some sports cards of relatively recent vintage now fetch millions of dollars; the prices of rare Pokémon cards have leapt. New trading platforms backed by celebrity investments are getting in on the action. The expanding mania may look like worrying evidence of a rise in the appetite for risk, and perhaps it is. Yet it also illustrates the increasingly social nature of investing—and poses new questions for financial economics.

Markets are not fine-tuned instruments of capital allocation. Rational traders are not always willing or able to bet against nonsensical market moves. Behavioural economists have identified a wide variety of cognitive biases that can lead investors to trade in irrational ways. People overestimate their abilities, are reluctant to realise losses even when prudence dictates that they should, and overreact to small movements in prices, to take just a few examples. Yet these sorts of biases do not seem fully to explain the strangeness of pricey digital videos of cats or an unprompted rollercoaster ride for the stock of an old-economy retailer like GameStop. As David Hirshleifer of the University of California, Irvine, noted in 2014, it may be time to move beyond behavioural finance to “social finance”.

What might that mean? A social finance could simply be one in which the social transmission of information has an important effect on markets’ toings and froings. In a paper written with Bing Han of the University of Toronto and Johan Walden of the University of California, Berkeley, Mr Hirshleifer suggests, for example, that shifts in norms regarding the open discussion of trading successes could affect which sorts of strategies spread and how. That, in turn, might influence the appetite for risk across the market as a whole. (Financial professionals would not be surprised to learn that social transmission of information is important; the need to be close to the buzz of informal market chatter is one reason why financial-sector activity tends to be concentrated in hubs like London and New York.)

Yet social connections could serve as more than just conduits for shop talk. Indeed, one person’s decision to make a particular investment could cause those around him to become more likely to follow suit. Investors following others’ lead could do so because they have learned something from their peers about a particular asset. You might take the plunge into cryptocurrency, for example, after discovering that it exists and hearing about its mechanics from a friend. Peer effects may also reflect a desire to “keep up with the Joneses”: either to demonstrate that you are as financially savvy as other people in your social circle or to avoid the embarrassment of missing out on financial gains that your peers have been clever enough to grab. Research by Patrick Bayer and James Roberts of Duke University and Kyle Mangum of the Philadelphia Federal Reserve turns up evidence of this sort of “investment contagion” during America’s housing boom. Analysing data from the Los Angeles metropolitan area, the authors find that residents became 8% more likely to take up property investment within the year for every neighbour living within a tenth of a mile who invested in housing.

But someone might also wish to invest in the same thing as others because of the opportunity for “joint consumption”, say Leonardo Bursztyn of the University of Chicago, Florian Ederer of Yale University, Bruno Ferman of the São Paulo School of Economics and Noam Yuchtman of the London School of Economics. That is, a person may derive enjoyment from an investment because it creates opportunities to talk about the investment with others and revel in the shared experience. That certainly helps explain why hobbyists of various sorts—like baseball-card collectors and Pokémon enthusiasts—might become involved in speculation. Swapping cards or gabbing about price movements is simply another way to bond with others over a shared pursuit. The rise of bitcoin and other cryptocurrencies has likewise been enabled by tight-knit communities whose members share interests and see participation in the crypto world as a part of their identity.

Better together

As the GameStop episode showed, trading as a fun group activity has spilled over into the staid world of company stocks, helped along by growth in retail-trading platforms and social networks. The video-game retailer’s shares jumped from around $40 to $400 in a fortnight, on virtually no news—powered, in part, by the activity of online communities like the WallStreetBets forum on Reddit, a social-media site. For many of the people sharing information about their bets and cheering each other on, financial gains or losses seemed secondary to the sheer joy of being part of the group. Investing became a consumption experience.

Not everyone may have felt it was worth the price of admission, though, particularly after GameStop shares sank back to Earth. An increasingly social finance raises thorny questions for policymakers. How easy should it be for novices to join in the financial-market equivalent of a flash mob? How should the financial power wielded by social-media influencers be regulated? Does the rise of investment as a mass social activity, pursued for kicks as much as for financial gain, threaten markets’ ability to direct money to productive ends? Yet it is also worth remembering that traders and markets have always been social beasts. A small fortune spent on an encrypted video of a cat may be less a sign of worrying change than a window onto how finance has always worked.

This article appeared in the Finance & economics section of the print edition under the headline “Regression to the memes”

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