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.