The Greater Fool Theory

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“Jason” people are always asking me “why are your finance articles so boring and heady when your articles over on Quiet Speculation are so fun and so closely resemble fart jokes?” I honestly don’t know how to answer that. I suppose my goal with this series is to delve a bit into some of the things I’ve learned over the years and write a serious article series just to keep people guessing. After all, isn’t that the greatest possible fart joke there is?

Joking aside, I want to launch into a topic that may help you not end up making poor investments in the future. I think there are two types of speculators in the markets, and both are essential to the process. You want to be one of those kinds of speculators and the other kind you do not want to be. At all. Let’s name the two kinds up front and then talk finance.

The first kind of speculator we will call an “Initiator”. If that term sounds somewhat arbitrary I want to assure you that’s only because it is. It’s totally arbitrary. I have a great name for the other kind of speculator but I had to just wing it for this one. I hope it sticks. It certainly sounds cool – you want to be an “Initiator” don’t you? Sure you do. Initiators initiate things. They take initiative. You want to be both of those things.

The other kind of speculator has a few different names. One of them is “bagholder”. Is that equally evocative? I hope so- you don’t want to be a bagholder. Bagholders are trying to sell Master of Waves for $14 on TCG Player right now and no one wants them. Bagholders are pretty upset about this because they bought Master of Waves at $15 when it was on its way to $25 and they thought they were pretty slick. They saw the price going up and thought “hey, me too!” and now they’re struggling to only lose a dollar on the hottest card of last weekend. What happened?

Well, put simply, they didn’t take the initiative. There is a theory in economics that helps us know when to buy and when to sell a card like Master of Waves that seemed like it was on its way to $40 just one short week ago. It’s the eponymous “Greater Fool Theory”

On a market gone mad

A lot of people watched the coverage of Pro Tour Dublin and thought “Wow, that Mono-Blue devotion deck looks incredible”. Thassa shot up from $12 to $25 overnight. Nightveil Specter went from bulk to $5, and Tidebinder Mage shot up from $1 to $6 at its peak. Team Starcity was all over those cards and Starcitygames.com raised their prices. When that happened, all hell broke loose on the markets. There was a sudden run on those cards. Many stores cancelled or modified orders because they didn’t want to “lose” money selling into such a price disparity. They were perfectly happy getting $1 for Tidebinder Mage 24 hours earlier, but that’s another article. Master of Waves went from $5 to $10 to $15 to $20 to $25 some places in a ridiculous frenzy of buying over a 48 hour period. If you saw that they were $20 most places and $25 others, you were smart to buy in at $12-$15 if you could, right?

And since the prices were rocketing up so quickly that many sites didn’t have time to register the increments between $5 and $20, who on earth was selling at $12-$15?

Me.

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On history repeating itself

Let me explain. I watched coverage like everyone else, but while many saw the next Jund, I saw the next UW Geists. When Dark Ascension came out, Huntmaster of the Fells was not a card anyone was excited about. It seemed like a durdly werewolf that took a lot of effort to flip back and forth and it wasn’t obvious where the card fit in. At the first few events where the set was legal, the card started to prove that even a small amount of advantage in the form of a wolf and some life made the card worth playing, but at the Pro Tour, no one was talking about Huntmaster of the Fells because Jon Finkel had broken the format.

Finkel took third place with a Delver of Secrets deck that utilized Dungeon Geists, Drogskol Captain, Phantasmal Image and Lingering Souls. The Drogskol Captain kept them from being able to target your Phantasmal Image and kill it, so you could either copy their best creature or make a bunch of copies of Dungeon Geists and keep their creatures tapped forever. The deck was all anyone wanted to talk about. The prices for Phantasmal Image, Dungeon Geists and even Drogskol Captain went up precipitously.

However, the deck would not rule Standard forever as everyone had anticipated. By early March, jund midrange and other Huntmaster decks were running roughshod and Delver decks took a different tack, dropping the durdly Dungeon Geists for more spells. A deck that took a PT by storm, was designed by Jon Finkel and looked invincible was nowhere to be seen.

It was with this in mind that I watched the coverage of Pro Tour Dublin and by Saturday morning, every copy of Nightveil Specter, Tidebinder Mage and Master of Waves I had were gone.

The greater fool theory

The greater fool theory is an economic theory that says, basically, that in a situation where the price of something is not driven by its actual intrinsic value (which isn’t $5 for Master of Waves but also isn’t $20) but by expectation and speculation, irrational buyers will set the price. Therefore irrational buyers will justify purchasing at a price that is above its likely intrinsic value by theorizing that someone even more irrational will come along and buy it from them. They are buying to sell to a greater fool than they are.

There is a problem with that. You’re taking a sure thing, like Master of Waves tripling and betting on something less sure, like Master of Waves quintupling. If you bought into Master of Waves around $5 (something I didn’t think was a good idea so all my copies came from packs) you had two choices. You could sell to a fool for $15 or hope to make $20.

However, fools had a much broader range of choices. They could buy in at $10 and hope their order wasn’t cancelled (good luck). They could buy in at $15 and hope to sell to a greater fool. They could buy in at $20 and try to trade them out at $20 when they arrived. They could stay out of it entirely, and if they had any $5 copies, they could hold onto them.

Why you sell at $15

Who is buying at $5 and $10? These are the Initiators. They either predicted the trend and bought at $5 or they saw the trend beginning and bought at $10. They took initiative in recognizing potential, and they initiated the precipitation of the price with their buying activity.

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Now, the easy way to answer “Why do we sell at $15?” is to simply ask “Who is buying at $15?” Bagholders, that’s who! If people were able to sell at $15 that means people were buying at $15. Now, some of those were people intending to play with the cards, and in a sense they were kind of savvy since they bought the card before it hit $20 and therefore virtually made $5. But given the card’s eventual settling at $12, they virtually lost $3. The people who weren’t intending to play with the card and who bought in at $12-$15 thought they were being smart. You probably think they were being smart, too. After all, $25 wasn’t an unreasonable goal for the card and buying a $25 at $12 is 100% profit, right?

Not so fast. Let’s bring this all full circle. It may seem like those bagholders were buying into a guaranteed 100% profit, but they were in fact banking on being able to sell to a greater fool for $25. A spec is only worth what you can actually realize when you sell it, any other numbers are purely theoretical. If there aren’t enough greater fools buying the card at $25, did you actually realize a profit? Now, the fools who bought at $15 take less of a bath when the card maintains $20-$25, that’s true. But my analysis was that the Mono-Blue devotion deck was a deck, not the deck, and therefore the hysterical high point of $20 was likely very short-term. I realize I gambled, too, but I picked a wager where my worst case scenario was that I tripled up.

In summary, it’s sometimes best to sell a card like Master of Waves that you don’t feel is going to be able to maintain its peak price for long at a price point where you have all kinds of fools buying, both greater and lesser. Don’t speculate after a card has gone up a few times hoping that it will peak at a much higher price- to do so is to fall victim to the greater fool fallacy and to be left holding the bag.

  • A lot of people in the finance community are saying now is the time to buy Thoughtseize. I can’t agree. MODO redemption has not kicked in yet. MODO redemption is going to inject more copies into the market, diluting the supply. This will mitigate the demand for Thoughtseize in two ways. It will either lower the price or it will not be enough to bring it down. Injecting more copies is not going to ever bring the price up so you can only benefit by waiting. When the MODO redemption copies start to hit the market, if the price does not go down, buy. If it does, wait for it to go back up a smidge and then buy. You only benefit by waiting.
  • M14 is about to be completely forgotten. Redemptions have slowed and boosters are not selling as briskly. This may be the floor for Mutavault. More mono-colored decks means people can get ballsier with their manabases and Mutavault is seeing play. This is an eternal-playable card and this is the cheapest they’re likely to be, ever. A reprint is extremely unlikely.
  • I think the weapons are bad specs. Yes, I realized this after I bought a big pile of Hammer of Purphoros. Thanks for reminding me. Even as nutty as Bident is (in that one deck), it’s likely to be a 3-of max and more likely a 2-of. Couple that with it having been a giveaway card and the other weapons being in pre-cons and you have a recipe for price stagnation.

That’s all for this time. Join me next time where we’ll discuss the Keynesian Beauty Contest.

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4 thoughts on “The Greater Fool Theory”

  1. So if another $5 card spikes in price and starts selling for between $15-20, would you tend to sell all of yours at $15 or price them somewhere in the middle?

    Also, what are your thoughts on Exava and Ogre Battledriver?

    1. I price my cards at TCG Low when I sell them and I’ll use whichever trading metric my trade partner suggests (letting them pick makes them more at ease) when I trade them out. When a card has a meteoric rise to the top the cheapest copies get bought up first, so make sure you’re not selling at $10 because the market hasn’t completely corrected yet. When the card is hitting $20 and not selling, you’ll want your copies up at $15 because they will snap sell in minutes.

  2. Yeah, that makes sense. And what do you think about those two cards I mentioned? Do you think they’ll ever have a significant spike? I hope so because I have several of each.

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