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Follow Up: More On Cute Animals, Surveys, And Bubbles…

January 14th, 2011 · 13 Comments
Buyer Beware · Decision Making · Macroeconomics

A few weeks ago, I posted a Planet Money poll involving cute animals and refused to let you speculate on what the experiment was about in the comments. Apparently at least some of my readers are quite well read, since I got a number of emails and other notes informing methat the experiment results are up. (Thanks guys!) From NPR’s Planet Money:

On the surface, Planet Money’s first-ever economics experiment was all about cute animals. (You can see the experiment here.) But we were really trying to get a better sense of how the stock market works.

The point is that strange things (read, bubbles) happen when people go from picking their personal favorites to picking “winners.” As some of you tried to point out in the comments, half of respondents were asked which animal they personally thought was cutest while the other half was asked what animal they thought others would think was cutest. The result was a “bubble” in kittens:

(Okay, I have to admit that a kitten bubble sounds adorable.) Why is this discrepancy problematic?

Marla Wood, a Planet Money listener from Colorado, was assigned to the second group. She thought the loris was cutest. But she picked the cat, because she thought that’s what everybody else would pick.

If the stock market were filled with Marlas, you could have a huge kitten bubble, even if no one thought kittens were cute.

It might look something like the housing bubble. People kept buying houses — not necessarily because they thought home prices made sense, but because they thought everyone else would keep buying houses at any price.

As it happens, Marla guessed right, as did 75 percent of the people in her group. But 25 percent of people got it wrong. They thought the loris or baby polar bear would win. If this were a cute animal stock market, that could throw off prices.

Yep, sounds about right. The frustrating thing is that, when buying something as an investment, it makes financial sense to think at least a little about what other people think your investment is worth. With stocks and bonds, this is not a huge deal, but you don’t have to live in stocks and bonds and look at the beige walls and the typical architecture because you couldn’t bring yourself to buy the weird house that no one else seemed to want even though you thought it was totally awesome. Who knows- maybe I’m just still bitter that I got a lecture about resale value from my father when I wanted a purple car.

You can read the whole NPR article and listen to the associated podcast here.

Tags: Buyer Beware · Decision Making · Macroeconomics

13 responses so far ↓

  • 1 Allison // Jan 14, 2011 at 6:56 pm

    That’s a really interesting study, and I never would’ve guessed the stock market was the illustration behind it.

  • 2 dWj // Jan 14, 2011 at 10:21 pm

    “Resale value”? I think I buy cars from people like your father — or, more likely, from the ones who resell cars but buy purple cars — and try to bargain “resale value” up to the price of the tow, but not usually successfully.

  • 3 Dan L // Jan 15, 2011 at 12:01 am

    Wow, this is a really stupid study. Are social scientists really this clueless? Now, if the second question was something like, “What percent of the population do you think likes this animal most,” and the average answer for kittens was 75%, then *that* might say something about bubbles. But that’s not what was asked.

  • 4 Justin Ross // Jan 15, 2011 at 11:03 am

    I think Dan L.’s restatement would be preferred, because then it would have represented an opportunity to adjust the responses a la Bayesian Truth Serum.

  • 5 Amarsir // Jan 15, 2011 at 9:03 pm

    I always liked questions that ask the participant to compare themselves to average. The measurement is simple yet it says a lot about our perceptions when you get results like “80% of respondents say they have better than average attractiveness.”

  • 6 Dan L // Jan 15, 2011 at 10:30 pm

    It occurred to me that I may need to spell out why this study is so stupid, since perhaps it’s not as obvious as it ought to be:

    In point of fact, the kitten was voted to be the cutest in the first poll, with a large margin of victory. This means that answering the kitten in the second poll was, in fact, the *correct* answer. If anything, people seemed to *underestimate* the popularity of the kitten. Or to put it another way, if people had perfect knowledge of the preferences of others, then the result of the second poll would be a 100% vote for kittens.

    Now, can someone explain to me why this has ANY relevance to bubbles?

  • 7 Pete // Jan 16, 2011 at 2:25 pm

    Cars are an expense, not an investment. They never pay you back. Ever.

    In fact, I think the auto industry was simply made up by insurance companies so that they could convince us that driving a 2-ton vehicle at 80mph would undoubtedly incur exorbitant repair and medical expenses for which we would need insurance.

    Totally bogus. Just like Valentine’s Day.

  • 8 Pete // Jan 16, 2011 at 2:30 pm

    @Amirsir – It is possible for 80% of respondents to have above-average attractiveness if we are talking about the mean of attractiveness levels. It wouldn’t be possible, however, for 80% of respondents to have above-median attractiveness; in this case at least 30% of the respondents are from Las Vegas and/or Atlanta.

  • 9 econgirl // Jan 16, 2011 at 3:53 pm

    @ Pete: Your theory about auto insurance is absurd- clearly, the auto industry was made up so that GMAC would have a product to finance, duh. Also, I fail to see how the chocolate and jewelry industries would survive without Valentine’s Day, so you’re going to ruin it for everyone with unromantic talk like that.

  • 10 Adam // Jan 16, 2011 at 7:06 pm

    Dan,

    Pretend each animal is a public company instead of an animal. The “true” valuations of each company are based on peoples’ actual opinions on cuteness. However, people might purchase more shares of Kitten Corp and less shares of Baby Polar Bears ‘R Us because they expect other people think Kittens are cuter and that the price of the shares of Kitten Corp will go up. The bubble will occur due to people misguidedly buying Kitten Corp shares even when they are overvalued. People are making valuations based on speculation of other peoples’ expectations rather then on what people think the true value of the companies are. This is bad.

    At least that’s my interpretation of this study. It’s a pretty cool idea and a great jumping off point about how bubbles occur.

    Adam

  • 11 Kirk Harr // Jan 19, 2011 at 6:22 pm

    Very interesting stuff. The idea of a speculative mania that creates transactions that are wildly at variance with their fundamentals in my mind is fueled primarily by the positive feedback mechanism of a favorable return with a similar strategy in the past. This gives another prime vector for this type of disjointed financial mentality to flourish, group dynamics and peer pressure could also be large components of the mania.

    Keynes would be proud they used real animals to test his concept of “animal spirits.”

  • 12 okl // Jan 23, 2011 at 10:29 am

    since G – T = (S – I) – (X – M),

    where
    g = govt spending, 100
    t = tax revenue, 100
    s = private sector savings (GDP – T), 0
    I = investment, unknown
    X = exports, 200
    M = imports, 100

    what i’m struggling to reconcile is how investment translates into this… for example, using the above equation;

    100 – 100 = (0 – I) – (200 – 120)

    0 = – I – 80

    I = -80?

    is it possible to have “negative investment”? i mean i understand that it is exogenous, but it does sound/look odd.

    another thing is that while i can understand “canceling out” consumption- if the locals buy local produce, an expense on the household sector becomes a revenue in the corporate sector- i can’t understand how “investment” works.

    specifically, where does the money for investment come from and where does it go?

    i’m trying to think simple here;

    in the business card economy, if a kid wanted to buy a shovel (capital equipment) from his brother, he would pay 50cards to his brother. if we do not count this as consumption, but as an investment, then how does the equation add up?

    and if we do count it as an investment, then how do we differentiate between a consumption and an investment when both seems to have the same “transfer of payments” within the private sector?

    all of these excludes foreign investment; i’m just wondering about the process of a local business making a local investment- if the money comes from the private sector and gets “deposited” in the private sector, then what difference is that from consumption?

    im really confused by this…please help!

    and also, my apologies for posting it in the comments section of an irrelevant post; i couldnt find a “forum” to post the question..

    cheers

  • 13 TerriTeacher // Jan 25, 2011 at 12:28 pm

    I’m struggling with a related reading that was listing determinants of endogenous variables. A footnote indicates that heteroskedasticity robust standards are denoted by parenthesis. Oh wise one please help me with the meaning of heteroskedasticity as I am not finding a common meaning

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