More Cognitive Bias in MTG Finance

Tweet by SaffronOlive // Dec 02, 2014

finance theory

A week ago I wrote about some common cognitive biases that can impact our financial decision. Based on the comments, Cognitive Bias in MTG Finance: Save Yourself From Your Mind may be the most popular article I've written, so here we are again. I'm not going to bother going over the introduction to cognitive biases again, please check out last week's article. Instead, we are going to jump right in and start talking about some more biases.

Choice-Supportive Bias

The choice-supportive bias is a faulty way of thinking which helps us reduce cognitive dissonance aroused by the choices we make. Say, for example, you are in the market for a booster box, or better yet, a booster case (having a more costly item matters in this instance, because common everyday low-cost decisions like which brand of gum to buy, or Chipotle vs La Vic usually don't cause much dissonance) and you're trying to choose between Magic 2015 and Khans of Tarkir. You consider yourself a smart and savvy magic investor, so the choice-supportive bias states that you will have a psychological stake in feeling like you made a good choice. If you start to think you made a poor choice, that calls into question whether you truly are as smart and savvy as you like to think.

The beauty (and horror) of the choice-supportive bias is that, no matter what you choose, your going to convince yourself that it was the right choice, simply because you (a smart and savvy magic investor) made it.

The choice-supportive bias leads to us justifying our choices in two ways. Let's say you decide to go with the Khans of Tarkir case. Once you crack it (and remember, this is an example, please, please, please do not crack a case of KTK looking for a profit - it's not there) you start to feel the dissonance creep in. "Did I make the right choice? Maybe I should have bought the M15 box." Since we don't like to feel this way, the choice-supportive bias will lead you to over-attribute the positive aspect of your KTK purchase (i.e. "sure, maybe I didn't make an immediate profit, but those fetches I opened are going to be expensive in the long run, I definitely made the right choice") and also glorify the negative aspects of the option not chosen ("Goblin Rabblemaster really isn't that great. Mardu is on its way out. I made the right choice by buying the KTK box instead of the M15 box.)

Dissonance and the choice-supportive bias makes me feel sorry for the pros out there (especially the pros who dabble in the financial side of the game). Part of their jobs, especially when a new set is released, is to make strong statements and format defining decklists, often with very little or no testing. If you remember the release of Innistrad, you might remember that the most handsome man in magic was very high on Daybreak Ranger. The trouble is, it quickly became clear that Daybreak Ranger wasn't a four-of standard staple, and more of a one-of Birthing Pod target.

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So what do you do when your big and very public bet happens to be wrong? You keep building decks with four Daybreak Rangers. Now to be completely fair, Kibler won Pro Tour Dark Ascension playing Team SCG's Kessig Wolf Run deck and played Tempered Steel at Worlds, so he didn't allow his Daybreak Ranger bet to hurt his performance at big events, but his example does illustrate the sticky situation pros often find themselves in. On one hand, part of your identity is tied to being better at Magic than everyone else and part of your job is to make your opinions known publicly. On the other hand, sooner or later, no matter how good you are, you're bound to make the 'wrong' choice, likely in a very public way. This leads to a a fertile ground for dissonance, for which the choice-supportive bias offers an unconscious way out.

Moral of the Bias: Be honest with yourself. Try to treat your specs objectively. Keep records to track both successes and failures (and there will be failures, I promise). Try not to see your failures as threats to your self-esteem, but as learning experiences which can help improve your future decisions. It helps if you don't have your identity too tied up in the cards you buy. Finally, realize that even smart and savvy investors make poor choices from time to time. A poor choice does not mean you are not smart and savvy, it simply means you made a poor choice.

Base Rate Fallacy

The base rate fallacy refers to our tendency to prefer specific information (i.e. information that only pertains to a individual case) over base rate (general) information, even when the general information is more important and valid.

Now I admit, I'm stretching this fallacy a bit to make it fit in the world of MTG finance, but at the same time, I think there is an important moral to this bias. I believe this bias applies most often to the evaluation of cool, different, and seemingly exciting cards.

Take a card like Savage Knuckleblade. It's easy to get caught up in the specifics of the card (it's a 4/4 for three, it protects itself, it has relevance in the late game, etc.) and forget the general, base rate information (it is a rare from a big fall set that is sure to be among the most opened in Magic history). The same thing can happen in regards to metagame shifts and event schedules. Sure, if you're looking at the specific information, Liliana of the Veil is the most powerful planeswalker in Modern, but the general information including the fact a GP promo is on the horizon and Liliana of the Veil decks are not that good in a field full of Treasure Cruise means that, despite the specifics, you probably want to be dumping your copies rather than buying in. Or what about the changes in the SCG Open schedule for 2015? Sure, the specific information on a card like Show and Tell might suggest it's one of the most broken cards in one of the most broken formats in Magic, but the base rate is that there are going to be 75 percent less on-camera legacy events in 2015 than there were in 2014.

Like I said, applying this bias to MTG finance is more in line with the spirit of the fallacy than its actual statistical origins, but the danger of cool things is real.

Moral of the Bias: Don't get trapped into exclusively evaluating cards and purchase on the specifics. Avoid making in-a-vacuum card evaluations and speculations. Magic is a game of many variables, and in many cases, the general, big-picture, base rate information is more important than the specifics of any individual card. This information helps explain why Temple of Triumph (big fall set rare) is $4 and Temple of Malady (small third set rare) is $10, even though Temple of Triumph is more heavily played.

Money Illusion

The money illusion, in a broad sense, refers to our tendency to think of currency in terms of nominal (the face-value) rather than real value (spending power). In other words, we tend to focus on the numbers written on the bill rather than the amount of goods or service they can buy. In reality, you can get a raise at your job and be less well off (if the cost of things you are purchasing increases by more than your raise) or have your salary stay stagnant and be more well off (if the cost of the things you are buying decrease). This interesting thing about the money illusions is that research shows we feel better about getting a raise, even if we have less spending power. Studies show that people are alright with a two percent wage increase and four percent inflation, but get upset by stagnant wages (zero percent increase) and two percent inflation, even though both of these hypothetical situations represent, more or less, a similar circumstance and the same amount of spending power.

The money illusion is especially relevant to MTG finance, although I find that it applies slightly differently than in the "real world." When I first started dabbling in the buying and selling of magic cards, I worked hard to memorize TCG-mid prices. After all, that is what most of the major pricing sites use as a guideline, so I figured that must be the real value of cards.

It took me a little while to realize that the price TCG-mid, SCG, CFB, or any other vendor charges for their cards represented the nominal value of my collection. Sure, maybe my Vendilion Clique is being sold for over $70 by all the big vendors, but how much spending power (real value) does my copy of Vendilion Clique actually represent?

Admittedly, there is no "right" answer to this question. Personally, I use the best buylist price from one of the six or seven sites I'm comfortable dealing with as the "real" value. If you use eBay to move your cards, the "real" value may be the average of the last five completed listings, minus 15 percent for fees plus shipping costs. If you are exclusively looking to turn your cards into other cards, maybe buylist plus a 20 or 30 percent store credit bonus is your "real" value.

The point is, assuming you are not running a LGS or a large online vendor, the real value of your cards is less then the all-to-commonly-used TCG-mid price. And in some cases, much less. If you base your purchases on these prices, you are pretty much guaranteed to lose money in the long run. This is especially important in speculation because your profit is based on the amount of money you get when you finaly sell the cards. I'm not going to go too in depth here since many other writers have this topic covered. Just remember that while watching your spec spike on a graph in some website is a great feeling, you really do not make anything until (and if) you actually find a buyer for your cards.

The one exception to this is trading cards for cards with another player. As long as you are using the same pricing method for both your cards and your trade partners cards, you should be fine. I would prefer to trade based on buylist prices (for my cards and my partners), but TCG-mid pricing is so deeply ingrained in the MTG finance culture I usually don't even bother to ask. Most trading partners don't like to hear that their Vendilion Clique is only worth $45, instead of the $70 they have in their head, even if I am willing to price my cards the same way.

Moral of the Bias: It may sound simple, but your cards are only worth what someone will pay you for them, so nominal valuations like TCG-mid are more or less meaningless. It is especially true to someone like me who buys and sells collections. Think about they way you usually sell your cards and come up with a formula for computing the "real" value of your cards. Train yourself to think in terms of real value (and remember shipping and fees) instead of the faulty nominal value.

Hindsight Bias

We like to feel like our world is rational and our lives are predictable despite the fact that we are often surrounded by absurdity. One way our minds try to keep events logical is the hindsight bias, which refers to our tendency to feel like we "knew it all along," even when, in reality, we did not have a clue. While it might seem harmless to believe that you saw the Desecration Demon/Pack Rat spike coming all along, the trouble with the hindsight bias is that it can lead to overconfidence and may trick you into thinking trivial events are meaningful.

Did you realize that Pack Rat is listed as having been in 1241 standard decks? How about the fact that exactly two of these decks were played before the release of Theros (and one of the two was at the 20-player Gatecrash Outland Trondheim?) It should be pretty obvious that placing 6th in an event smaller than many Friday Night Magics doesn't have much meaning, but these are the types of things that the hindsight bias, in our desire to have a predictable world, causes us to see as meaningful.

Once you start looking back and thinking, "It was all so obvious, the top 8 at Trondheim was a sign. Even though I didn't pull the trigger on Pack Rat I knew I should have. I'm going to make sure that never happens again!" You are in a dangerous place, a place that could lead to you looking at decklists and buying a 100 copies of Tymaret, the Murder King as a result of overconfidence (and misplaced meaning) caused by the power of the hindsight bias.

Moral of the Bias: Generally speaking, we don't expect something to happen until it does, then we suddenly see the forces that brought the event together, and feel unsurprised. I try to remind myself that I'm not as smart as I think I am (and chances are you are not as smart as you like to think you are either). At the same time, don't be too hard on yourself when your choices turn out poorly. We tend to forget that what seems obvious now wasn't so obvious back when we were not buying Pack Rats a year ago.

Conclusion

If you come away with one thing from these two articles, I hope that it is the realization that, even though we like to believe our way of thinking is logical, smart, and well reasoned, it often is not. Try to become cognizant of these biases; the best way to avoid their perils is to think about your thinking. This isn't necessarily an easy process, but it's worth it. Not only will you make better Magic related investments, but other areas of your life will improve as well.

That's all I've got for today. As always, you can leave it in the comments, or on twitter @SaffronOlive. I've also started posting on my blog in between articles. Until next time, may all your thoughts be fault-free.