How Picking Supermodels Is Like Valuing Toxic Assets

Original source: SimoleonSense.com .

Beautiful women, decision making, behavioral economics, influence, and persuasion….I’m in the wrong field.

Hat Tip to Mind Hacks for finding this interesting piece.

Introduction (via the very brilliant Ashley Mears@ 3 quarks daily)

In 2002, a tall and skinny 14-year old girl competed in a dance contest in Vancouver, Canada. There she encountered a modeling agent, who asked her to consider going out for modeling jobs. Today, the 22-year-old Coco Rocha is celebrated as a “supermodel” (however little of its glamazon power the term retains these days), appearing on covers of Vogue and i-D magazines, on catwalks from Marc Jacobs to Prada, and as the star face for Dior, H&M, and Chanel. You might not recognize her name, but the chances are you’ve seen Coco Rocha in the past few years.

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? What makes Coco Rocha more valuable than the thousands of similar contestants? How, in other words, do winners happen?

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When trying to figure out how winners happen in the modeling industry, the first thing to know is that nobody knows. This was one of the most striking things I discovered over the course of researching fashion. Clients—designers, photographers, and stylists—don’t know what makes one model a better choice than another. And how would they? It’s an inherently uncertain task, hinging upon aesthetic preference, unknown consumer demand, and quick turnover—fashion is, after all, by definition change.

Fascinating Excerpts (via the very brilliant Ashley Mears@ 3 quarks daily)

In behavioral economics, Coco Rocha’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 Coco) 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. We see such effects in fields ranging from consumer fads (think Atkins—everyone knows a meat-and-cheese diet isn’t healthy for you!), science (like global warming), and technology (VHS beat BETA in the video market, though BETA was a superior machine).

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 (captured well in signaling instruments like options), they exacerbate systemic risk. Essentially, valuing financial goods is a matter of trying to be in fashion, which is a gamble.

In fact, the economist 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.

But perhaps most worrisome in the fallout of the economic crisis is our ongoing commitment to an ethos of individualism to make sense of it all. We chalk the crash up to a few bad apples and “greedy” executives gone astray—not far off, by the way, from rhetoric in the fashion press celebrating the genius new beauty of Coco. Without a view of the market as a social body—composed of individuals acting in concert with each other, aided by financial models, and bound together by conventions to help them anticipate one another’s actions—we can’t see how participants act together. Yet their collectively attuned steps can inflate or deflate the value of assets, thus building economic values from cultural ones. Don’t take Fashion Week at face value; the catwalk delivers an important sociological lesson for free market enthusiasts.

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