Welcome back, constant readers

Last time I think I made it as far down the “Greater Fool Theory” rabbit hole as wikipedia pages is going to take me. I think we covered some new ground and maybe we’ll get some of those concepts to stick. We might; I caught someone on Reddit encouraging someone not to be a “baggage holder” which I thought was pretty sweet. I made a case for not buying when it only helps people who bought in cheaper. What say we put an end to all the non-traditional finance articles for a while? It was cool to delve into theory for a while, but I felt like I covered “don’t do this” thoroughly. What should you do when you’re not too busy not doing that stuff?

That’s a good question. I think I am going to go back to what I know. And what I know is that if you live in a somewhat densely-populated region of the world, there is a good shot you’re fewer than 50 miles from Magic cards you want and that are owned by someone who doesn’t know what they’re worth.

I know that somewhere in the United States there is a guy who owns a computer repair shop and sells Magic cards out of a dirty, cracked display case. He looks up card prices in a Scrye magazine from 2003 and takes mint condition cards out of a cardboard longbox and gives a discount if you pay him with cash. The cards in the case are just for show- he only sells the cards from the longboxes that have been untouched by human hands for years. I know because I bought Sylvan Libraries from him for $4 and we talked about Baseball.

I know that somewhere in the  United States there is a guy who has a few dirty binders behind the counter of his comic book shop. He priced the cards back during Mercadian Masques and he has a computer that he uses as a cash register, but it doesn’t connect to the internet. He writes receipts by hand with an ornate silver inkpen and figures out the tax in his head. I know this because I bought Unhinged booster packs from him at MSRP, Tower of the Magistrates for $2.50 and a Karakas for $5 when they were $40 and we talked about our favorite “Daredevil: the Man Without Fear” writers.

I know that somewhere off a dirt road that you will only access if you make a wrong turn as I did there is a store called the “Antique Barn” with an old cracker barrel out front with an electric lamp that only looks like an oil lamp and inside they have a box of Magic cards with a handwritten sign that says “Each card $1 dollar[sic]” and I bought three Goblin Lackey, four Recruiters, five Elephant Grass and a Sterling Grove for $1 each. When I asked how much he would sell me Portal Basic lands for he said “Whassda sign say?” before spitting chewing tobacco spit into an Ice Tea bottle. I left the lands.

I know that when I go to a town I’ve never been before, I do what you would do. You pull up the Wizards Store locator and just see if there is a place that sells cards, holds events, has a community. You’ll drive past it until you realize you saw a cardboard cutout of Gideon or a sign with Jace on it, sun-weathered and dog-eared, and you’ll turn the car around and go back. They’ll have cases full of cards and they’ll look the prices up on Star City Games and knock 5% off and beam magnanimously like they offered you a free gold bar instead of cards that are still 15% above TCG Player. You’ll look for two minutes then pack back into the car. If there are five places in that town, four will be like that and one of them will be OK.

I know this because Ryan Bushard and I like to go on shop crawls and hit lots of stores. I wrote about one of them on QS a million years ago. We called dozens of shops ahead of time to see which ones we could eliminate based on a phone conversation and still hit a lot of busts. We hit a few great ones, too, but the best shops we hit were on accident. People who do this sort of thing usually do it wrong. I know, I did it wrong for a long time, and I still do.

How often do you check your local Goodwill? I have found cards there. I haven’t found anything great, but if Reddit is to be believed every few months someone somewhere will hit it big and find very good cards for almost free. I have ruled out my town. Have you? You live somewhere after all. Mothers clean out closets when kids go to college. Good stuff ends up in odd places. It takes five minutes to look.

Your success rate at garage sales is going to be under 5%. Better go to at least 20 in your life if you want to beat the odds. Have you gone to 20 garage sales looking for cards?

You want to know the REAL goldmines? Baseball card shops. Shops that sell gold coins and geodes and old, weathered newspaper clippings in vinyl bags. Flea markets in small, flyspeck towns. You think you’re going to show up in Duluth Minnesota and find a $5 Karakas in a binder ten minutes before an FNM starts with people elbowing you out of the way so they can buy sleeves or pay their entry? You think you’re going to find good singles in a binder that doesn’t have a layer of dust on it?

I would wager there is a store in the town you live or an adjacent one you’ve never set foot inside. It doesn’t look on the outside like it has Magic cards inside. That’s the point. You want to be first. You want them to reach down underneath a counter, or move a stack of comic books to uncover an old box. You see Pokemon cards mixed in? Great, they aren’t looking that up on Star City. They’re probably going to take an offer on the box. I’d wager there is value fifty miles from where you’re seated and you never thought to look there because no one thought to look there. I used to think I had to go far from home to find the value. There couldn’t be anything close to where I live, right? I would have found it already.  Someone I know would have. How are you supposed to find undiscovered treasure if you think like everyone else? Start ruling local places out. Widen your search to neighboring towns.

I played FNM and booster drafts for 18 months in a motorcycle garage after they closed for the night, two card tables jammed between displays for helmets and gloves, the air smelling like oil. Should you check every motorcycle repair shop and used car dealership and petting zoo for singles? I can’t tell you what to do.

But I know no one else checked there first.

Finance Quick Hits

• We don’t know much about Born of the Gods, but neither does anyone else. We’re getting a G/W Temple. Expect GW stuff to increase in price on hype alone. Be a seller, not a buyer in those situations.
• Kiora looks pretty bad to me, but there is hype. Temple of Mystery is at its floor. $5 is demonstrably the ceiling for a temple, but Kiora hype could make this happen and that’s a double-up.
• Kami of the Crescent Moon is selling for $6 on TCG Player. Check any and all gold coin stores and computer repair shops near you. A lot of weird stuff spiked this month.
• It’s too late for Genesis Wave, but if that deck is a thing, cards like Primeval Titan have room to go up. Be prepared.
• Sam Black is brewing in Modern. Pay attention when Sam Black brews.
• When the new set comes out we will still be using packs of Theros to booster draft. Take this into consideration.

Hello, Constant Reader

In the last installment, we dealt with the Keynesian Beauty Contest and how thinking rationally and a few steps ahead can lead to your avoiding potentially ruinous decisions. Taking into account what everyone else will likely think in a given situation is how you make the best possible informed answer.

In my research for the last piece about the Keynesian Beauty Contest, I stumbled across some reading about the concept of Nash Equilibrium. Did you see “A Beautiful Mind”? Well, that John Nash, portrayed by Russel Crowe in the film proposed the theory. Stated simply, Nash Equilibrium is a Mexican Standoff. In a non-co operative game, situations can arise where each player who knows the other player’s best strategy will not benefit from changing their own. They are essentially in a deadlock, or in Equilibrium.

What defines this equilibrium is whether party A is making the best decision they can, taking into account the decision party B will make, and that all hinges on on Party B making the best decision they can accounting for what Party A is likely to do. This doesn’t even have to be a dichotomy, as any number of players can be involved and they will only be in equilibrium if they make the best decision they can given all of the other players’ decisions AND provided they don’t change their decision.

I got into this topic because I believe artificial price spikes are the kind of system that can be modeled using this theory, but I also believe that in the case of artificial price spikes we don’t have a true Nash equilibrium because I believe there is a party integral to the system that is not making the best decision they can for themselves but rather the best decision for the system based on faulty logic on their part. The result is the same, though, because the decision they make does not disturb the equilibrium of the system. I maintain, though, that it probably should.

In a lot of ways the “cog” in the middle of the great machine is most important and also most tightly-bound to the rules of Nash equilibrium. At its core, it’s a theory that says once equilibrium is established, no one can do better by changing their behavior. Unfortunately, that’s true.

Moving Parts

Why is it the middle cog that is so essential? It’s really simple – in this case, the guts of this equilibrated system are the greater fools we discussed earlier. To recap briefly, the Greater Fool Theorum as applied to Magic finance is a premise that means some people buy into a spiking card and can only expect to make any money if someone more gullible buys the card from them at a higher price. These greater fools are what makes it possible for artificial spikes based purely on hype and buying frenzies to occur, and their unenviable position makes these systems follow the rules of a Nash Equilibrium. The only reason this works has to do with how someone becomes part of the system.

If you are participating in a card spike, you get “in” when you buy in. The first buyer is a store or individual who bought the card for its pre-spike price either because they wanted to have it to play with / in inventory or because they saw the spike coming. There is hype, either from deck results, conjecture or someone initiating the price movement with a big buy-out of a site (it only takes one site, usually; the rest fall like dominoes) but the system is not in equilibrium until there are more players.

This is where the greater fools come in. They buy at a post-spike price that may be lower than the peak price, but once they buy in, they are sunk. They absolutely have to hope for even greater fools to buy from them at the spike price or they are sunk. Lots of people break even in this position, and it’s no fun to be in for a few reasons.

The hallmark of these artificial spikes is a card starting at X, spiking to 2X when it’s bought out, peaking at 4X at the peak of hysteria and going back to 2X as people undercut each other trying to rid themselves of copies of the card. Inevitably in these cases, a lot of fools who buy in at 2X end up bagholders and sell out for 2X again.

The worst part about their position is that they are locked in to Nash’s theory of equilibrium as soon as they buy in. What are their options? Sell out at 2X immediately? That doesn’t help them out of the jam they put themselves in. There really is nothing they can do to improve their position but wait and try to sell to a greater fool, and their inaction doesn’t violate the equilibrium of the system. They really have no options except for hope, and hope is not an investment strategy.

For the other actors, they have few options as well, and they get forced into their positions. I’m not sure you can have a true equilibrium as envisioned by Nash (who also envisioned people who weren’t there, so what does he know?) when people have their initial move determined for them, but I would argue that you have the option to stay out of it, so even making forced moves is still abiding by equilibrium because doing anything else but making the forced move (or staying out of it) is not going to give you a better outcome and therefore are bound to the system. So a player who wants the card to play with doesn’t have a choice but to pay the card’s price at the time they buy in.

One actor we’ve ignored until now is the actor who initiates the price spike. Could this person or persons act in a different way and end up better off? This is the true test of the theory as it applies to the scenario I have concocted. When you think about it, buying low and selling high is probably the optimal play, dumping as many copies onto the market as fast as they possibly can is probably the optimal play (for them) and maximizing their profit in the shortest time-frame possible is probably optimal. There is really nothing they can do to improve on this, and in so many of these cases, this is exactly what we see happen. This actor is in an enviable position, but that doesn’t mean there is any benefit to breaking the rules and making a different play than the one everyone expects.

The Point

Why do we care about the concept at all? Even if you agree with my analysis (assumptions) about the system, what good does establishing the system is a Nash equilibrium do?

I maintain that mtg finance is cooperative, as all system bound by the theory must be. If you buy cards, you help the seller. If you sell cards, you help the buyer. And if you buy an artificially-inflated card for 4X, you help the guy who bought them for X and knows that 8X is a pipe dream. Since this is the case and once you lock yourself in and pay 2X or 4X for a purpose other than just playing with them, you’re locked in. You will not benefit by doing anything other than what everyone expects, and if you think that position is unenviable, it’s probably best to win the only way you can.

Don’t play.

Last time we delved into how to behave when you think the market is being irrational. I talked about the virtues of selling before a card peaked to maximize the number of people who would be buying as the card was rising and therefore would have more confidence in their ability to make money as the card had not yet peaked. Those buyers are the eponymous greater fools and they are an essential part of the market, both rational and irrational. I mentioned then that this theory correlated with something called the “Keynesian Beauty Contest” and I spent the last week or so thinking about that concept and how it applied to the market. Let’s dig in.

The Name of the Game

The simplest possible example, albeit not the most illustrative, was Keynes’ original example, the “beauty contest” example. Imagine there is a contest in a newspaper with several photographs of women. The rules state that you mail in a selection of one of the photographs and whichever gets the most votes will be deemed the most beautiful and every person who voted for the winner is eligible for a prize. In a scenario like this one, there is no incentive to behave irrationally, you’re simply trying to pick the winner.

This example and the subsequent theory associated with it got me thinking about the dozens of examples in the Magic market. We said it’s best to behave rationally and that’s true. However, there are multiple dimensions we need to consider and it may not be as simple as we think right off the bat.

The Different Levels

A first-level thinker will pick the girl he thinks is the most beautiful. “Snap asian girl, not close” he says, using Magic community slang because I invented him and I can make him say whatever I want. He’s a rational guy after all. Asian women appeal to him so he sends off his answer and waits for his prize to come in the mail.

A second-level thinker is going to really delve a bit deeper into the heart of the problem. The actual name of the game isn’t to pick what you like and hope your tastes correlate with the norm. That seems risky and there is too much variance in what people might think. Provided there are enough second-level thinkers they are in a better position here because they tend to behave the most rationally. I’ll explain. Say a second-level thinker also prefers the picture of the asian woman. I am beginning to regret going racial with this and I probably should have just separated them by hair color, but stay with me. The best part about this is that the second-level thinker is going to pick the girl he thinks the majority will go for, irrespective of his own personal inclinations and if that’s not wild enough, think about what will happen if there are mostly second-level thinkers in the contest. A second-level thinker will assess all of the photos, determine that the blonde, western-looking woman is closest to the traditional Western definition of beauty and make the determination that she is the one who will get the most votes even if they prefer another girl. The even more wilder part is that you could get a situation where 100% of the people personally prefer the asian, or redhead or whomever, but the first-level thinkers who pick her will lose because all of the second-level thinkers will think that the others will pick the more traditional-looking girl. They will either think that the others will think she is the most beautiful, or they will think the others will think that everyone will think that. In other words, they know the “right” answer and pick that even if it’s not the true answer.

In practice, many people are second-level thinkers provided the example is as straight-forward as the beauty contest. It could be anything, pictures of cars, flavors of ice cream; NPR’s Planet money did it with internet videos. Enough people know that the “right” answer is always “cat video” even if there is a hamster sneezing or something equally adorable. It’s not about the “true” answer, it’s about what everyone else is likely to think everyone else will think.

Adding More Levels

You can go beyond first and second-level thinking by making the problem more complex. This is better for our purposes because the way cards fit together in the vast framework of a metagame and multiple formats is more complicated than “pick the best removal spell out of a list of three spells.”

Imagine you are asked to pick a number between 1 and 100, but the number you pick isn’t just a random number because the winner is the person whose number is the closest to 2/3 of the average of what everyone says.

In this case, we need to make the first-level thinker dumber. He’ll snap 27 because it’s his favorite number.

Second-level thinkers will likely say 2/3 of 50. They’ll reason that everyone else is a moron, guessing randomly. The random distribution should, in theory, average out to 50 and therefore 2/3 of 50 is the right answer.

Third-level thinkers will reason that everyone else is likely a second-level thinker and therefore the answer will be 2/3 of 2/3 of 50. If you think everyone else is a third-level thinker, maybe you want to go 2/3 of 2/3 of 2/3 of 50. Maybe not.

First Level Magic

A Commander deck was printed with a card in it that sells for more than the total cost of the deck. Obviously you go buy Mind Seize and crack it to sell True-Name Nemesis for value. You’ll spend $30 and make $5-$10 on top of recouping the initial $30 and have 99 free cards. Repeat Ad Nauseum. Might I suggest that that’s first-level thinking?

If you want to think second-level and above (if there is a third level to this example) you need to imagine that everyone is going to be cracking Mind Seizes and selling the Nemeses. What can you do to capitalize on a market behaving this way? For starters, they will undervalue the other 99 cards they get. Some people are doing this to get free cards, most just want the Hamilton that comes from the quick flip. This behavior is going to put downward price pressure on the value of Sol Ring and Baleful Strix for starters. Second-level thinking involves picking up cheap Sol Rings from people who are undervaluing them. We’ve seen the price of Sol Ring dip and rebound before, there’s no reason to think it won’t again, even with all of the copies hitting the market. Since the decks are only getting reprinted at the rate that the worst-selling deck needs reprinting, there won’t be infinite Sol Rings injected into the market. The price will recover, and you’ll be glad you bought very cheap. The same can be said of Strix which sees more and more play every day. Buying cards that are likely to be undervalued is a good way to capitalize on a market with a lot of first-level behavior going on.

A first-level thinker will often speculate on a card based on their own interpretation of its power level. “I think Biovisionary’s effect is powerful” is a good example. Sure, you might like it, but there’s no money in hitching your wagon to Biovisionary, the asian woman of card picks. Here’s the painful part for me; I have been guilty of first-level fallacies myself and a lot of us still are because we don’t realize that we’re thinking on such a primary level. You want to know the battle cry of the first-level thinker? You won’t like this, I didn’t.

“This has been insane in our testing”

I get teased for throwing my support behind the card Seance even though I made some money on that card. I fell victim to the “this is insane in our testing” mentality and I thought that all I needed to do was tell enough people how good it was and they’d eventually test it and come to the same conclusion. I was thinking about how much I liked the picture of a Seance and not thinking about how everyone else was going to pick something else. Second-level thinking would have been noticing that Brad Nelson had brewed a deck that was nearly identical to ours but ran 0 Seance and was winning without it. Irrespective of how much that card improved the mirror, the winner of the contest was going to be Brad Nelson’s blonde-haired, blue-eyed girl next door, and thinking different was, well, first-level.

Finally, the MODO “crash” when a lot of prices tanked and people threatened to quit over the temporary suspension of daily events, a lot of first-level thinkers saw opportunity. With prices tanking, there was a chance to buy low and sell high later. The best part about this example was the conclusion that second-level thinkers came to. The real beauty here is that first-level thinkers aren’t always wrong, what they are is useful.

A second-level thinker saw that opportunity and reasoned that a lot of people were going to buy into MODO for the sake of potential profit. Regardless of MODO continuing to be a good gaming community, Redemption is coming up and was unlikely to be affected by the downtime. Second-level thinkers reasoned that all the first-level thinkers buying in for profit were going to stabilize prices. This made it safe to buy in on Theros block staples that would be essential come rotation and speculate on booster packs because they would be more scarce with fewer being won as prizes in events.

Heck, third-level thinkers probably imagined some of the second-level thinkers were going to stabilize booster pack prices despite them tanking initially, making early booster investment a safe bet.

Wouldn’t you know it? That’s exactly what happened.

How to Be Going Forward

If you can stay away from some of the pitfalls that beset the first-level thinker and reason what the herd behavior is going to do to the market, you can stay ahead of it and really make some good decisions. Remember, there’s no money in being average. Not when 2/3 of average is the name of the game.