Herding Part Two: Superstars

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.

Typical outcome of the music download experiments; number of each of the 48 songs downloaded over the course of an experiment, participants only know the names of the song and band and can listen to songs before deciding whether or not to download. The average number of downloads is set equal to 100 for comparative purposes

Same experiment as before except the participants know the number of previous downloads of each of the songs before they decide themselves

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

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conrad
conrad
9 years ago

“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).

desipis
9 years ago

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.

rog
rog
9 years ago

In his latest client letter Jeremy Grantham (GMO) talks about herding in financial markets. Warren Buffett also is in agreement.

The central truth of the investment business is that investment behavior is driven by career risk. In the professional investment business we are all agents, managing other peoples’ money. The prime directive, as Keynes1 knew so well, is first and last to keep your job. To do this, he explained that you must never, ever be wrong on your own. To prevent this calamity, professional investors pay ruthless attention to what other investors in general are doing. The great majority “go with the flow,” either completely or partially. This creates herding, or momentum, which drives prices far above or far below fair price. There are many other ineffi ciencies in market pricing, but this is by far the largest. It explains the discrepancy between a remarkably volatile stock market and a remarkably stable GDP growth, together with an equally stable growth in “fair value” for the stock market.

Tel
Tel
9 years ago

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.

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?

Why should the creator of the content and not the socialisers get the economic benefits or ownership?

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!

Jc
Jc
9 years ago

Does Gratham himself admit to beng part of the herd or does that only appl to others?

Jc
Jc
9 years ago

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.

JC
JC
9 years ago

I’m not sure of the relevance of your observation

Here:

his General Theory is that “the long-term investor, he who most promotes the public interest … will in practice come in for the most criticism whenever investment funds are managed by committees or boards.” He, the long-term investor, will be perceived as “eccentric, unconventional and rash in the eyes of average opinion … and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy.”

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

rog
rog
9 years ago

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.

JM
JM
9 years ago

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”