This wasn't supposed to be the theme of part two (Part One is here) but Jessica Irvine's recent and timely column on superstardom and One Direction prompted me to add my two cents' worth - well someone else's two cents' worth but at least inserted by me.
First; highlights from Jessica's column:
US labour market economist Sherwin Rosen in his 1981 paper ''The Economics of Superstars'' identified two preconditions that lead to superstardom. First, every customer in the market must want to buy the good supplied by the best producer. The second condition for the birth of a superstar is that the good provided must be able to be distributed cheaply to all customers in the market. You don't see superstar plumbers, because their services are only available to one geographic area.
Rosen's theory of superstardom as an efficient outcome of the market was challenged by another US economist, Moshe Adler, who pointed out that whether people preferred one singer over the other was not necessarily determined by how talented they were. There is, after all, no standard unit to measure increments of talent. The key thing about groups like One Direction, according to Adler, is not that they are the most talented - for such a thing can never be measured - but that they are simply the most popular.
According to Adler, consumer desires are not innate preferences - as standard economics assumes - but are influenced strongly by society. We desire the same art, culture and music that is desired by other people.
To which I would only add the graph below which features in Paul Ormerod's forthcoming book. In a controlled experiment with people listening to music if they were not 'networked' which is to say they didn't know what other people thought was good, there was a fairly big inherent difference between songs. If they were networked, they 'herded' strongly.
Of course the upshot of this is that we're all madly herding from one place to another, but the extent to which there's signal in the noise of our herding is greatly attenuated. Further; large amounts of rent are being expended trying to get people's attention with marketing to get into people's headspace and win the battle for the next hit.
"We desire the same art, culture and music that is desired by other people."
I'm not really sure that people desire what others want all the time -- rather, people are just good at using others as an easy way to make relatively good choices (the opposite is true also if you happen to know you don't conform to a certain style, in which case you can avoid things you won't like, e.g., films).
Yes, but in a number of areas - like TV programs an important motive to participate in others' choices is to get 'in' on the scene - have something to talk about with peers.
The music experiment highlights one of the reasons I don't like the current intellectual property model when it comes to popular culture. In essence the value is created and utilised through the socialisation of the content, not on the quality of the content itself. Why should the creator of the content and not the socialisers get the economic benefits or ownership?
It'd be interesting to know the number of previews/listens the participants chose to do before downloading in each of the experiments. That'd give a indication if social influence impacted the way they judged the songs, or if it was the sole basis for selecting the songs.
In his latest client letter Jeremy Grantham (GMO) talks about herding in financial markets. Warren Buffett also is in agreement.
Yep, it's a great quote. And it's a fine piece of analysis - containing this which I liked:
And there's no particular reason to believe that talent is the product that people are interested in buying, either. So on what basis can you pretend to make a call on market efficiency?
Err, they have been one and the same people, ever since record producers started buying their own albums to get onto the "charts" which happened, um, um, well much longer ago than I can remember, that's for sure!
Does Gratham himself admit to beng part of the herd or does that only appl to others?
Nic
I think you'll find that Keynes wrote that during the time he was investing/trading with macro themes and he wasn't very successful.
A tiny fraction are.
It was only after he became a stock picker that his success started to show... And he was a great stock picker.
Joe, I'm not sure of the relevance of your observation, and I'm also not sure of the facts, but I think that Keynes was successful in both roles, but that the former role gave him some much hairier moments. (Which of course may be evidence that he was a neophyte lucky enough not to come across any big black swans.)
Here:
According to what I read, at the time he wrote General Theory, he was still taking macro bets that weren't panning out. He seems to be saying in that quote, the world is mad except me. Keynes appeared to end up as a value investor. Funny that currency trading wasn't for him. He should have squared his position in Rome before the big shopping expedition.
http://can-turtles-fly.blogspot.com.au/2010/12/john-maynard-keynes-great-investor.html
Keynes was both a speculator and an investor. His speculation made and lost large amounts while his investment portfolio (Chest Fund) grew. His Chest Fund consistently outperformed the UK index. As an investor he was contrarian that is did not follow the markets. Ben Graham and Warren Buffett later followed his method and Buffett spoke highly of Keynes.
Rog, re. Graham and Buffet and herding. I think Soros might be saying the same thing with his "reflexivity". He's often talked about the self-reinforcing effects of market behaviour and the outcomes of beliefs about future behaviour.
IHMO he doesn't express it well but it makes sense if described as "herding"