Why Supermodels Are Like Toxic Assets
Fascinating economic discussion from 3 Quarks Daily, on how the market for supermodels functions:
“[Supermodel] Coco is what economists would call a winner in a “winner-take all market,” prevalent in culture industries like art and music, where a handful of people reap very lucrative and visible rewards while the bulk of contestants barely scrape by meager livings before they fade into more stable and far less glamorous careers. The presence of such spectacular winners like Coco Rocha raises a great sociological question: how, among the thousands of wannabe models worldwide, is any one 14 year-old able to rise from the pack? How, in other words, do winners happen?
The secrets to Coco’s success, and the dozens of girls that have come before and will surely come after her, have much less to do with Coco the person (or the body) than with the social context of an unstable market. There is very little intrinsic value in Coco’s physique that would set her apart from any number of other similarly-built teens—when dealing with symbolic goods like “beauty” and “fashionability,” we would be hard pressed to identify objective measures of worth inherent in the good itself. Rather, social processes are at work in the fashion modeling market to bequeath cultural value onto Coco. The social world of fashion markets reveals how market actors think collectively to make decisions in the face of uncertainty.”
What does this mean for finance? Consider:
“This social side of markets, it turns out, is key to understanding how investors could trade securities backed with “toxic” subprime mortgage assets leading us into the 2009 financial crisis . . .These formal and informal mechanisms result in a classic cumulative advantage effect in which successful goods accrue more success (also known as “the rich get richer” phenomenon, or by Biblical reference, the Matthew Effect) . . . In behavioral economics, a model’s success is a case of an information cascade. Faced with imperfect information, individuals make a binary choice to act (to choose or not to choose) by observing the actions of their predecessors without regard to their own information. In such situations, a few early key individuals end up having a disproportionately large effect, such that small differences in initial conditions create large differences later in the cascade.
Herding and cascades are rather problematic to financial markets; they leads investors to artificially bid up asset values, thereby leading to bubbles and eventual crashes, even if investors knew better all along, which, it turns out in the housing market, they largely did.
But because investors, like fashionistas, react to each other as well as to the aggregate traces of fellow investors’ actions, they exacerbate systemic risk.“ (emphasis added)
An unusual and interesting article worth reading.
>
Hat tip Mike Panzner
>
Source:
How Supermodels Are like Toxic Assets
Ashley Mears
3 Quarks Daily, July 12, 2010
http://www.3quarksdaily.com/3quarksdaily/2010/07/how-supermodels-are-like-toxic-assets.html
Tweet
Facebook
Reddit
Digg this!
July 14th, 2010 at 9:28 am
Here’s another scientific fact worthy of note:
If you eat less you lose weight.
You can eat less by eating less or you can join weigh watchers or another group and pay a lot to eat less.
People are smart. Crowds are stupid.
July 14th, 2010 at 9:32 am
“I better use this girl, who looks nothing like the people who will eventually wear my clothing, for my show because all the other designers are using her. Who cares if those people look like schlumps in my dress, as long as the model looks good on the runway!”
July 14th, 2010 at 9:40 am
So, what he’s effectively saying is that herd mentality heavily impacts collective market behavior, in every thing from supermodels (somebody please define that term for me, but keep in mind, until I read this post I’d never even heard of Coco–is she really only fourteen?) to subprime CDO’s.
So, when enough humans get together and can communicate nearly instantaneously they begin behaving like a herd of wildebeast, or a school of fish, taking their cues primarily from others in the herd, rather than from the environment in which the herd finds itself. Perhaps next we’ll find that sometimes the herd acts like any collection of organisms, such as the collection of cells making up a human body, and does things that aren’t necessarily good for the individual cells/herd members, such as crossing a croc-infested river, but that enhance the herd’s collective survivability. All I can say is that it should be obvious by now that biology is the mother science of economics and psychology, and thereby market behavior.
July 14th, 2010 at 9:49 am
I’m Jungian on this one. IMO it’s a zeitgeist/collective unconscious thing and I think the crowd is often right with who is selected as the next belle de jour. Economists usually know better than to try to quantify subjective taste in art, which is exactly what “super models” are. They are physique + presence/persona + makeup + fashion + artistic and social context. As “products” of marketing and fashion industry, models as we perceive them are works of art.
I’ve looked at models for a long time so I know what I’m talking about. ;-)
July 14th, 2010 at 10:13 am
This piece could have, easily, used GE stock, instead of “Supermodels”, as its Subject..
(less page hits, though, for sure)
even, from the art. : “… John Maynard Keynes likened finance markets to casinos, in that both are based in speculation. To illustrate, Keynes drew on newspaper beauty contests from the 1930s, where readers were asked to rate the contestants, but with a catch. The prize would go to the reader that could guess the highest ranked winner. So readers would rate not what they themselves thought was personally beautiful, but what they thought other readers would find beautiful. The sociologist would add that beauty is always in the eye of the socially-dominant beholder, but as a metaphor for financial markets, it should worry us, as it worried Keynes: Finance assets accrue profits not according to their actual worth, which, at the height of the housing boom we know now were vastly inflated; rather, their worth is generated in how speculators perceive what other speculators will perceive. A finance market, like a fashion market, consists of speculators chasing each other’s tails in disregard for what things are really worth…”
LSS: thinking Political Economists have long realized the eminent *Truths being expounded upon..
“How fortunate for leaders that men do not think.”
http://www.military-quotes.com/leadership-quotes.htm
~~
also, a good case of what is being described here: “…Jaron Lanier, the father of “virtual reality,” is perhaps the most respected and outspoken technologist to identify a troubling deficiency in our cultural health. In You Are Not a Gadget: A Manifesto, Lanier writes that our culture has become one of nostalgic remixing where authentic “first-order expression” is chopped up and mashed into a derivative piece of “second-order expression.” …”
https://www.adbusters.org/magazine/90/ecology-mind.html (h/t Ahab)
“…Lanier writes that our culture has become one of nostalgic remixing where authentic “first-order expression” is chopped up and mashed into a derivative piece of “second-order expression.” …”
July 14th, 2010 at 10:22 am
good article BR. would love to see more pieces on behavioral economics as i find this area of study to be very effective in educating on a key aspect of investing. successful marketing and advertising firms have this down pat as well. there are a number of articles on the recent phenomenal success of the Twilight and the Harry Power series. i came away with both educated but also once again reminded on how lost the human herd is.
July 14th, 2010 at 10:22 am
This is JUST like Wall Street. The truth is simple: she slept with right people (mostly photographers.) But it’s better (for the sake of the photographer – often Steven Meisel – and probably the agent) to make it seem like some complicated process. Alcoa only beat expectations because those expectations had come down so egregiously over the last two months. But it’s better (for the street) to make the truth as opaque as possible.
When the truth is ugly, hide it. It’s the mantra of most money-making industries.
July 14th, 2010 at 10:27 am
That’s what makes this blog so great: information cascade based on early selection by social leaders.
You’re welcome, BR.
July 14th, 2010 at 10:31 am
I always say, when you can take your knowledge and effectively apply it to something outside your field of expertise, you’ve done something. In this case, it’s linking sociology (Mears is both a former model and a Ph.D.) to behavioral economics.
And, making decisions with imperfect information- not all that different from trying to hole out from the fairway- is a way of life…all we can realistically hope for is to set up birdie putts.
July 14th, 2010 at 10:36 am
I’m with The Curmudgeon – it’s an analysis of herd mentality.
I’d also add that the moral of that particular story is that you would rather be the price-maker than the price-taker. The first guy Russell Marsh and others like him are the price-makers, so they get in early, and basically can’t do wrong (or rather, their failures are easily forgotten). Everyone else then sees the few “successes” and bids them up (so a bull market), and these guys become price takers.
What would be particularly interesting is figuring out that point of critical mass for a model – where everyone accepts that she’s the one to have. I don’t think he goes into that at all. And at what point does the model become more important than the clothes (is that the underlying/overlying asset???) ? Does Coco whatshername then adopt the role of a ratings agency, ie she lends credibility to the collection?
July 14th, 2010 at 11:01 am
Isn’t this what’s called trend following?
July 14th, 2010 at 11:11 am
Funny, I don’t know Coco by name by subconsciously I recognize her face. It must be all the times I passed by her face on the magazine aisle. Now she is imprinted on my subconscious. I’ll bet if I met her in real life I would have thought I dreamt of her at one time or another.
Anyway, that said these people benefit from leverage. It just isn’t the traditional leverage we are used to. Theirs is social and marketing leverage. They get ‘picked’, plugged into a channel and marketed to the rest of us until we all decide we like them and want more for a fee. All they did was win the marketing lottery that 10,000 other women who walked through the door ten minutes later failed to benefit from.
This type of thing was easier when mainstream mega media corp. controlled everything we see and think back a generation ago but it still works if you hit the right marketing network. Just take a look at the Disney formula for launching ‘franchises’ of performers onto their network of kid revenue and beyond. Disney is never lacking in resumes and portfolios filling up the inbox from thousands of agents
July 14th, 2010 at 11:39 am
Common Man your disney channel analogy is spot on. The “price makers” decide according to their vast wisdom and understanding of current culture what the next big thing should be and contribute to bending the public psyche that direction via their machinations. Same with next season’s upcoming fashion trend. Who comes up with those fashion ideas anyway? Those who’ve been ordained as having more insight than others based upon some historical successes directly attributable to their skills or by mistake. There’s more randomness in this process than observable on the surface. With that being said the lottery winners should be eating a bit more humble pie.
July 14th, 2010 at 11:48 am
Soros summed it up best..Markets can be efficient for awhile..but occasionally Market Participants have the ability to effect the fundamentals… such that a self-reinforcing phase leads to a bOOm/bust overshoot.
July 14th, 2010 at 12:03 pm
Rikky,
Who comes up with those fashion ideas anyway? Those who’ve been ordained as having more insight than others based upon some historical successes directly attributable to their skills or by mistake.
For those folks it is even easier. If the skirt is short this season it is long the next. Then back to short the following season. That is simpler than setting interest rates.
It is not that bad but they seem to have about twelve basic styles that they cycle through. They are trying to co-opt men into it too in order to expand their market but guys just laugh at the supposed peer pressure.
July 14th, 2010 at 12:07 pm
Models may be toxic assets but they’re self-correcting: falling out of favor leads to market price correction.
MBS, etc. creatures I think relied on an eventually caused high correlations between housing markets. Artificially boosted through origination and secondary market sales, it pulled and correlated demand. Now that the market has collapsed, we’re seeing corrected correlations: Detroit suffers, Texas keeps on truckin’.
So the “options” market for models (runway types) is a correlating activity that leads to demand boostage?
July 14th, 2010 at 12:17 pm
HTCMSI,
ya know, ‘someone’ “wrote the Book on it”…
CHAPTER I
ORGANIZING CHAOS
THE conscious and intelligent manipulation of the organized habits and opinions of the masses is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country.
We are governed, our minds are molded, our tastes formed, our ideas suggested, largely by men we have never heard of. This is a logical result of the way in which our democratic society is organized. Vast numbers of human beings must cooperate in this manner if they are to live together as a smoothly functioning society…
…It is they who pull the wires which control the public mind, who harness old social forces and contrive new ways to bind and guide the world…”
http://www.pentaside.org/article/propaganda-bernays-1928.html
and, to a certain extent, it’s ~funny, the Book, itself, is Propaganda..
http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Bernays+Propaganda
July 14th, 2010 at 12:51 pm
Mark,
You and I seem to have come from a time where cynicism was programmed into people. I was a kid through the ’70′s….explains a lot ;)
BTW Mark, have you read the book The Fourth Turning? I haven’t read it but have heard the authors interviewed a few times. It is a fascinating premise that I think someone with your mindset would appreciate
http://www.fourthturning.com/html/exploring_history.html
July 14th, 2010 at 5:05 pm
It’s really hard to figure whether the topic or the comments on the topic are more absurd.
July 14th, 2010 at 10:34 pm
Why Supermodels are Like Tulips…
July 14th, 2010 at 11:23 pm
That is why the financial system is so screwed up;
Bankers act like a bunch of perverts!!
ha-ha
July 16th, 2010 at 12:20 am
Well, if you are into finding parallels between Women and finance you should check this clip from How I met Your Mother:
http://www.youtube.com/watch?v=knhMESIJGqI
:-)