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Insider: Three Psychological Effects That Can Cause Bad Financial Decisions

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Have you ever seen the PBS television show Antiques Road Show? It’s basically a traveling antique convention, where people come from all over the country to share their rare and exotic possessions. Inevitably, someone will walk in with a $3 garage sale trinket and act mildly surprised when they find out it’s a rare collectible valued at over $5,000. Then after the entire encounter, the owner usually claims how there’s no way they’d sell their precious good.

To me this last part is so bizarre that it borders on reckless. These people often purchase items on a whim from a flea market and suddenly refuse to let one go when they find out it’s worth a small fortune. Isn’t this backwards? Shouldn’t their demand for the item go down if they found out it’s worth so much? I mean, everyone has a price right? To state that people want their trinkets more when they find out they’re worth significantly more than initially believed is in violation of classic Adam Smith economics!

It turns out there are some advanced economic concepts that buck standard supply and demand trends. I believe these exceptions to the rule can explain the Antiques Road Show behaviors demonstrated on the popular television show. And here’s the kicker: I believe some of these same concepts can be translated to MTG to explain certain trends and behaviors in the field we’re all keenly interested in: Magic finance.

Confirmation Bias

One probable universal truth is that we all prefer to be right. So much so, in fact, that there’s a concept called “confirmation bias” in which we sometimes interpret ambiguous data as supportive of our believes and decisions. If I buy a stock and make money, I may draw the incorrect conclusion that my overall strategy is optimized and will work again and again.

So what happens if I buy an Old School card like Juzám Djinn and it jumps in price?


My interpretation is that I was correct about buying Old School cards, which leads me to buy others. Because I have confirmation bias, I may conclude that all playable Old School cards are worth buying—however in buying a few and seeing prices climb, my bias is only increased. Given the rarity of Old School cards, it only takes a few people to think this way to create a self-fulfilling prophecy and increase prices in these cards.

For example, I noticed recently that a few Unlimited cards have finally gained some traction. It seems the trickle-down effect is finally running its course and as players want to enter into the Old School format, they seek more cost-effective ways of doing so. Alpha and Beta cards are out of reach for most individuals, but Unlimited is relatively accessible. With this hypothesis in mind, I start shopping around and looking at pricing trends.

Sure enough, my mind hones in on recent instances where Unlimited prices have already jumped, confirming my bias towards my hypothesis and encouraging me to purchase copies myself. In fact, last Saturday I did buy a Near Mint Bad Moon. What happened next? The card immediately showed up as a mover on MTG Stocks because of my purchase, adding to my confirmation bias that these Unlimited cards are worthwhile pickups!


In order to avoid further confirmation bias, I’ll just mention a list of Unlimited cards I think you should investigate. Just look at the data and, without any bias, tell me if I’m drawing the correct conclusion here. Ankh of Mishra, Disrupting Scepter, Sedge Troll, Blaze of Glory, Balance, Bad Moon, Raging River.

Veblen Goods

This concept was the initial motivation that drove me to write this article. I was thinking about my own resistance to selling certain cards. Namely, cards I had acquired at a significantly lower value than where they’re at today. Not only did I enjoy the pride of owning such high-end cards, but it almost felt like I wanted the cards more when I knew they were more valuable.

The most recent trap I fell into here was my copy of Guardian Beast.


A year and a half ago in Grand Prix Las Vegas I picked up an MP copy for around $40. Fast forward to the present; it’s apparent from the graph above that my purchase ended up paying off nicely. Here’s the catch: the more valuable Guardian Beast became, the more I wanted it. In a strange, counter-intuitive way my interest in the card grew proportionally with its price.

If nothing else, I should have been racing to sell this card to the first person willing to pay market price. But I just couldn’t bring myself to do it—this despite my initial purchase being motivated by my belief it would be a good investment that would pay off over time.

What’s wrong with me??

Enter the Veblen good. According to Wikipedia, “Veblen goods are types of material commodities for which the demand is proportional to its high price, which is an apparent contradiction of the law of demand…”

In other words, Veblen goods are equivalent to status symbols. Someone may value their Vintage collection even more as prices increase because it’s a way of indicating they are long-time players of the game. Even if their entry price was pennies on the dollar and they’re sitting on thousands of dollars in profits, they may like their classic cards even more as prices climb.

This could explain my attachment to Guardian Beast, in addition to the ever-increasing prices of iconic cards such as Power or Beta dual lands. As prices climb, these collectibles become more like status symbols, which carries along more demand.

By the way, I finally recognized my folly with Guardian Beast and gratefully sold my copy to Card Kingdom for a $108 after grading. Their buy prices on status symbol cards can be quite generous sometimes.

The Bandwagon Effect

The third psychological and economic phenomenon I want to discuss is the Bandwagon Effect. This is a fairly well-known concept, but I think some people overlook its significance when chasing cards with rapidly rising prices.

Some price charts show a reoccurring theme where a card gains traction slowly and steadily until, all of a sudden, the price spikes. The recent spike in All Hallow's Eve showcases this sort of trend very well.


Notice how the card did nothing for years and then recently it spiked. In between the flat portions of the curve and the spike, you can see gradual upward movement. But then all of a sudden the card blew up and is now priced ridiculously high on TCGplayer.

In my opinion this is a prime example of the bandwagon effect. As a card’s price rises and supply dries up, people begin to notice. Then, at some sort of tipping point, the card is bought out by everyone afraid of missing out on the trend. Everyone instantaneously becomes a believer in the card’s value, using confirmation bias to convince themselves that the trend is worth buying into. “This card is on the Reserved List and it’s almost Halloween, so it won’t ever get cheaper than now!”

This is the equivalent of “chasing” a buyout. It’s reckless and can lead to significant losses. Notice, for example, that the top buy price on All Hallow's Eve is still just $50. Stores aren’t increasing their buy prices to follow the trend. They may, eventually, but for now they recognize this is a buyout.

When observing trends that could be falling prey to the bandwagon effect, patience and logic must prevail. To give into emotions is to hop on the bandwagon, likely leading to a loss. One should always sell into spikes, not buy.

Wrapping It Up

The bandwagon effect, Veblen goods, and confirmation bias are three psychoeconomic phenomena that have direct influence in MTG finance. Of this there is no doubt in my mind. Every time I see a card spike randomly, I think people are reacting with their emotions rather than their minds.

As a card I own becomes more valuable, it becomes measurably more difficult for me to sell the card because I become more attached to it—recognition of this should help me overcome my emotions and take profits where it makes sense. And just because I get lucky a few times doesn’t mean my strategy is universally successful. That’s just confirmation bias kicking in.

In fact, there have been some Old School Reserved List cards I picked up a while back that haven’t paid off as I had anticipated. I bought an HP copy of Diamond Valley a while back for around $100. Despite significant movement on TCGplayer and MTG Stocks, I couldn’t move my HP copy for anything north of $100.

I fell into a trap, thinking that all Old School cards must rise in value but neglecting the true underlying market forces driving certain prices higher. It turns out Diamond Valley really isn’t played in Old School and not many people wanted HP copies. I also barely eked out a profit on a NM Nether Void, failing to recognize that rampant Reserved List demand didn’t necessarily mean fringe-playable $200 cards would jump the same percentage.


Psychology can be a dicey variable when it comes to money. People often make strange decisions when money is involved, and it’s important as investors that we keep our emotions in check and apply logic as much as possible. Increasing awareness of concepts such as those discussed in this column is one way to improve performance and reduce emotional decisions.

It’s never a bad thing to have emotional attachment to certain cards—but recognizing how this can lead to suboptimal financial decisions is critical to striking a balance between enjoyment and financial results.

…

Sigbits

  • Near Mint Unlimited Ankh of Mishra is becoming quite rare. Star City Games has no copies in stock with a $20 price tag. The only copies they do have is a set of MP copies at $9.99. This is one example of an Unlimited card gaining price traction despite its white-bordered nature.
  • Wheel of Fortune has really gained traction lately, suddenly doubling in price in a few short weeks. This is likely driven by a multitude of factors: Vintage, Old School, Commander, and the Reserved List are all factors in this card’s price jump. With Revised copies selling at $49.99 for Near Mint at SCG, I wonder how much higher the card can climb from here. I think Unlimited copies may be the best copies to buy here, but either way these aren’t likely to drop no matter what set you purchase.
  • When Aluren spiked for the billionth time, I managed to find one copy at the “old” price. As soon as it arrived, I rushed to cash out and claim my modest profits. But it’s quite clear to me the green enchantment does not have Veblen good status. It may be more expensive, but demand hasn’t really risen much. In fact Star City Games has 80 total copies in stock—only a few are Near Mint, but the quantities available across all conditions tells me these aren’t very desirable right now.

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