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Insider: Behavioral Economics, Part 1

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Welcome back, readers!

Today's topic is a deep one, but one that I personally find incredibly fascinating. First we'll need to define behavioral economics. According to Wikipedia, the basic definition is this:

"[The study of] the effects of psychological, social, cognitive, and emotional factors on the economic decisions of individuals and institutions and the consequences for market prices, returns, and the resource allocation."

Now you might be asking yourself what does this have to do with Magic the Gathering Finance? And the answer is...a whole lot.

Shortcuts: Because the Brain Is Always So Busy

To begin with we'll do a little experiment. Suppose you're in the market for a graded Unlimited Black Lotus. Now suppose you go to a major retailer and they have three in stock.

  • BGS 9.5- $11,000
  • BGS 9- $6,000
  • BGS 7- $5,000

Which would you pick?

?

?

?

Is this your card?

BGS 9 ul black lotus

A large majority of us would pick the BGS 9. The reason is that our brains like to associate things and recognize patterns whenever possible. The decisions we make are often far more complex than we realize and the brain naturally tries to shortcut them by looking for relationships to make comparison easier.

In this case we see a “lower grade” option at $5,000 but for a little bit more we can get a pretty high grade option for $6,000 and to go only slightly better it will cost us almost double.

Now, how can that help us? Well, if I have three copies of a card, one in NM, one in LP, and one in HP, it means I'll likely move the LP one first if I group them next to each other so that my trade partner can see and directly compare all three simultaneously (assuming we assign a lower value to the LP one and our trade partner isn't a "NM or nothing" kind of person).

If I were instead to spread all three throughout a trade binder I would be forcing my trade partner's brain to recall the previous ones, which may or may not change my trade partner's choice. When the brain is not directly forced to compare it will likely revert back to it's original intent, which for some players means only NM will do, whereas others will go for the cheapest option. Which likely means that you'll either trade off your NM copy or your HP copy but not the LP you want to get rid of.

Relativity

Now let's do another fun experiment. Let's go back to our quest for power. Suppose you enter a major retailer and you're shown the only three pieces of graded power they have.

  • BGS 9 Mox Sapphire-$5000
  • BGS 8 Mox Sapphire-$4300
  • BGS 9 Mox Pearl -$4600

Which do you pick?

?

?

?

Is this your card?

bgs 9 ul mox saphire

In this case we are looking at a concept called relativity. The brain sees one item, another inferior item, and a dissimilar item and it naturally wants to latch onto the highest grade “similar” item.

So in this instance if we have a higher grade item we want to move, it would be best to put it next to an inferior version (if possible) and then something dissimilar.

It is also interesting to note that graded cards allow for this type of reasoning even easier than most. The grading company creates a numerical identifier that the card is associated with and our brains naturally assume that the higher the number the better the card, which is another example of our brain taking a shortcut when trying to make a difficult decision.

Anchors: Why Our Respective "Values" Don't Match

This next concept is an important one that can be applied to all facets of your life. The idea of an "anchor" is that the "first price" we see of something sets it's value and any differences are evaluated compared to that price.

What do I mean by this? Well, say you missed out on the last Pro Tour coverage and a card you wanted to pick up for your deck ended up being the all-star of the format. You could have got all four copies last week for $4 total. Now each card is $5.

The first person you walk up to and ask for said card will pull them out and then give you your total of $20, but your brain has previously affixed the price of $1 per card. You balk at the new price because so recently it was much cheaper. The $1 price is an anchor your brain has set in place and it will affect your evaluation of a card's value until your brain accepts the new price and "sets" another anchor. The time it takes to set the new anchor will vary, but this are another example of the brain taking a shortcut when making a decision.

What's interesting about price anchors is that they can actually cause you to bypass the most efficient "deal" because your brain values the "cost" at a much higher level of importance than other factors.

A good example would be if you're trading with someone and they undervalue five of their cards by about $2 each, but they overvalue one card by $8. If they won't break up the trade then you're more inclined to walk away because of the one card being overpriced than the five being underpriced.

Loss

The price anchor concept can also apply when cards drop in value. Though in that instance we have another factor to consider. The brain doesn't like taking losses of any sort. This is why, when a card plummets in value, people will be weary of trading them away at their current value because their last price anchor was set on the old value.

This happens the most when you have an expensive card reprinted, as value can plummet dramatically very quickly as shown below.

urborg tomb of yawgmoth stock

Most people who are sitting on these are likely now in the "well it'll probably rebound" camp, but the reason they jump on this reasoning is because it offers a hope of eliminating some of their loss. The problem is on casual cards like these, the mindset of the player who wants this card is different from that of a competitive player. This is often why reprints don't decimate the original printings price of eternal staples as much as casual favorites. That mindset will likely direct them to the "cheapest" version.

Ownership

Another factor in determining values revolves around the concept of "ownership". We as humans attach additional value to things we own, often unknowingly.

For example; if you have to sell your foil cube to pay some emergency bills you'll likely want the full value of all the cards in it, and likely a bit more as you remember how painstakingly long it took to get all the cards for it. It might be worth $4000 but you ask $4400--after all, you went to numerous big events, searched vendor tables and thousands of trade binders to finish that cube; you're saving the buyer all that time and effort.

This thought process is the "additional value" that you have placed on the item because as the owner you recall a lot of intangible things specific to said item. Whereas, your buyer looks at it and thinks, well I could just go and buy every card online for less than that.

They don't value it the same as you do. It doesn't mean either party is wrong; it is just human nature to attach more value to things you own than things you want. As expected the more effort you have to put into the ownership of an item, the more "value" you add to it.

Further Reading

If you find these concepts interesting and would like to read more in depth on the matter I suggest Predictably Irrational by Dan Arielly as many of the concepts in this book were used as the skeleton of this article.

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David Schumann

David started playing Magic in the days of Fifth Edition, with a hiatus between Judgment to Shards. He's been playing Commander since 2009 and Legacy since 2010.

View More By David Schumann

Posted in Finance, Free InsiderTagged

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3 thoughts on “Insider: Behavioral Economics, Part 1

  1. I posted an article a month ago on the forum about economics and psychology.

    I also asked for more articles about that subject, like this one. Did you read it?

    Thanks, I hope to see more interesting theories about economics on psychology level.

    I use psychology a lot with my bulk box. I also do some experimenting with it.

    1. I actually didn’t catch that post, but I definitely enjoy this subject. I’d love to know how you use psychology with your bulk box, if you don’t mind sharing the secret.

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