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Sooo…Does This Mean We’re In a Banksy Bubble?

October 15th, 2013 · 6 Comments
Behavioral Econ · Buyer Beware · Markets

While Eugene Fama may claim to not know what a bubble is, I’m pretty sure that the generally accepted definition is something along the lines of “a situation in which the price of an asset is significantly above its fundamental intrinsic value.” A couple of years back, Planet Money illustrated that a kitten bubble could be created by holding a “beauty contest”- i.e. asking people to choose the animal that they thought other people would find the cutest rather than having them choose which animal they personally thought was cutest. So what does this have to do with Banksy?

In case you haven’t been following him, Banksy has been going around New York “vandalizing” various random locations– and earning the owners of the properties quite a bit of cash in some cases, since Banksy works can sell for well into six-figure territory. So what happened when he had a random old guy try to sell some of his (signed) stencil work in Central Park for $60 each? Well, this:

So, there are a few potential explanations for this behavior:

  • People didn’t even pay enough attention to notice what was being sold in the first place. Think about it- if you walked by people selling random art on a daily basis, would you thoroughly check it out each time?
  • People, on principle, didn’t want to support somebody who was trying to profit by ripping off Banksy.
  • People don’t intrinsically (i.e. for their own consumption purposes) value the Banksy works at a price of $60, suggesting that the prices that Banksy gets for his work are not so much for the work itself but because Banksy is Banksy and they think that other people will be impressed/pay a lot of money for the pieces.

That last explanation is what leads to bubbles (or, at the very least, conspicuous consumption), whether they be in houses or novelty…well, whatever it is that Banksy creates. (I also wish that Banksy hadn’t signed the pieces and had just documented them on his web site, since that would at least partially take away the second explanation above.) In any case, it certainly reminds me of what happened when Joshua Bell played his violin in a DC Metro stop:

It’s a bit shocking how context, expectations, and perceived social preferences affect how much value we place on things. Sorry Fama, but it looks like the potential for bubbles is everywhere.

Update: Great minds think alike. =P

Tags: Behavioral Econ · Buyer Beware · Markets

6 responses so far ↓

  • 1 Bank-sy // Oct 15, 2013 at 7:15 pm

    The problem of course is finding this mystical “fundamental intrinsic value.” Austrian economists in talk about some “intrinsic value” of gold. This is of course a meaningless rhetorical device used to sell an otherwise silly economic model, so what about in the context of asset bubbles?

    Similarly what is the intrinsic value of an asset? If prices are determined by supply and demand it would seem to reason that the value would be determined by time-preferences and whatever other markets the asset is tied to (“intrinsic” stock value determined by economic factors related to a firms overall production process for example).

    Expectations obviously play a huge role but then what is it, fundamentally, that causes so many agents to get it so wrong all at the same time? Why those particular assets, at that particular time?

    If I had a compelling answer for what a bubble is I’d have a really nice CV. Still, a little switch goes off in my brain when ideas like intrinsic value get discussed.

  • 2 Benoit Essiambre // Oct 15, 2013 at 7:39 pm

    The value of collectibles often comes not from the objects themselves but from the exceptional contexts which spawned the objects

    Wouldn’t you pay more for a prop that was actually used on the set of your favorite movie and handled by real actors instead of an identical reproduction?

    Wouldn’t you pay more for an object that was a key during an important historical event even though there are many objects like it used by unknown people in unknown contexts?

    Wouldn’t you pay more to collect an original tool invented by your favorite pioneer scientist even though there are much better versions of this tool in use today?

    Wouldn’t you pay more for works by an artist that invented new innovative techniques than artists who just reuse others’ techniques even if the later artists arguably get better results because they are using the techniques after they have matured and have been perfected?

  • 3 Marc // Oct 15, 2013 at 7:50 pm

    The timing of the event has as much to do with the creation of a bubble or even the value placed on an item.
    I’m not sure if this is a good example, or not, but what about online dating sites. The people who are available and actively looking is a reflection on what is going on in their personal lives. How much interest a person garners depends on many factors including how active he or she is in responding to contact. The bubble is created in the person’s mind based on all the contacts. The person then sets a personal value on themselves on what he or she expects from potential dates and that value inflates until either a marriage results (or whatever the goal was for signing up on the site is achieved) or it pops when all contacts stop or a relationship ends.

  • 4 econgirl // Oct 16, 2013 at 1:24 am

    @ Bank-sy: I kind of hate the term “intrinsic value” for pretty much this reason. If I were more careful with my words, I would probably use the term “consumption value” instead, which I have decided is the value that you would get out of something if you couldn’t sell it or show it off to others. In this way, gold has little consumption value, since I can’t eat it, it doesn’t keep me warm, it’s not particularly entertaining, etc. By this definition, bubbles are what happens when assets get far away from their consumption values. It appears that markets are most fragile when people value items simply because they think that other people value them, and markets are somewhat fragile when people value items because they think that they impress others (i.e. conspicuous consumption).

    @ Benoit: I don’t disagree with you (or think that sentimentality creates bubbles), but I do think that there is a bit of a difference between what you describe and some of what actually goes on with collectibles- see, Babies, Beanie. 🙂

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