Fortunately, I was able to give myself the gift of a Nintendo Wii this Christmas. Only after I received my Wii did I discover how “rationally insane” people can be in their attempts to find such a hot-ticket item. The following illustrates how random walk theory, coupled with rationally insane people, can lead to unpredictable results.
A local store, other than my own, had a “rogue” employee leaking out “classified” information to customers that their store would be receiving Wiis in stock on a Sunday in December. The advertisements that stated that the Wiis were in stock were located in the Sunday paper (the same Sunday they would have them for sale). However, this store had a line outside prior to opening, as well as an article that somehow found its way in to the Gazette, claiming that this store would have Wiis in stock. The interesting thing about this situation is that our store, which is located in the middle of nowhere (Union & Powers) actually sold out just as fast, if not faster, than the other store. We also had a fairly long line of shoppers, practically clawing each other to death, in their venture to be the first to reach the electronics department by the time we opened.
In chapter six Harford discusses how “rational” investors can be “rationally insane” because of the random walk theory. He discusses how a few, more knowledgeable, investors will profit from anticipating market behavior, but most will not. The reason for this is because once enough people catch on to the market trend, the trend will end because every investor will be doing the same thing. This is definitely one of my favorite points of his book because it shows that behaviors we perceive to be rational (based on our value judgments, of course) can be blatantly irrational.
Wii shoppers definitely exhibited this rationally insane behavior. After all, when the “rogue” employee told shoppers they were getting Wiis in stock, he said they were going to be in the weekly advertisement. It is obvious that people were able to put 2 and 2 together and figure out that all the stores in the area were getting Wiis in (otherwise, why bother spending the money to advertise it). People thought they could one up each other by going to our store (quite possibly, the least busy in town). However, this led to us selling out extremely quickly. What people perceived as the easiest way to get a Wii actually became very difficult because everyone had the same perception, causing only a lucky few to reach their holiday shopping goals. People thought they had it all figured out, and ended up costing themselves a Wii, because the other store’s stock lasted a little bit longer. “Rational” people ended up being the losers, because their “rational” behavior ended up causing the Colorado Springs Wii market to behave in an unpredictable manner.