Pokémon GO is a huge, viral sensation, and it is no surprise that investors—the intelligent, informed participants of our wonderful, free-market capitalist system—took their money and flocked to Nintendo to reap some of that sweet, sweet low-hanging fruit that is the Pokémon profit bonanza.
When Pokémon GO was released on July 6th, investors began rushing to buy Nintendo stock, raising Nintendo shares’ value by 120%. It was a truly impressive gain of $23 billion.
Except there was one problem: Nintendo isn’t actually the company who made the game, and Nintendo only has a small stake in Pokémon GO which will not translate into giant profits.
A week ago Nintendo put out a public statement to investors admitting that they had little to do with Pokémon GO, and that they had already incorporated their projected Pokémon GO profits into their expected earnings report. Naturally, investors were quick to flee, and the company’s shares dropped 18% on Monday, swiftly reaching the daily limit of stock losses.
This kind of thing is rarely seen in the slow, day-to-day slog of business, but it is amazing evidence that contemporary conservatism is an economic sham. The Pokémon GO craze and the subsequent ballooning of Nintendo’s stock value are proof that the conservative Holy Ghost—the unfettered Free Market—is not some hyper-efficient Taoist force of economic equilibrium like conservatives say.
The lesson from this, plain and simple, is that people are not always smart with their money. Neither do consumers always make the right or the best decisions when they buy things, as buyer’s remorse is a common phenomenon in the human psyche. Even more importantly, it shows that the investor class—revered by conservatives for their business acumen and intelligence—can be just as clueless as anyone else about the economy. With sudden crazes like Pokémon GO, investors are not unlike a herd of zebras on the Serengeti blindly following the crowd.
In their rush to get rich, investors didn’t bother to look up what company actually owned the game they saw everyone playing. However, what must sting conservatives most is seeing such unambiguous proof that the free-market is capable of being unproductive, inefficient, and stupid.
Because investors were so clearly uninformed, Nintendo put out a press release to inform the market that Nintendo will not be profiting handsomely from Pokémon GO. Less responsible companies would likely have suckered investors for as much money as they could get, but Nintendo voluntarily did them a favor by stopping this bubble before it got bigger. The fiasco is a rare case of a corporation telling investors that they are grossly overestimating its value, and Nintendo may have just helped save the world from an economic bubble in augmented reality games by telling the market that it was wrong and needed to correct itself.
Nintendo’s show of rare corporate integrity meant that its stock value skyrocketed and plummeted in half a week, though the plummet was softened by a daily limit of 18% in stock losses. Without that daily limit Nintendo’s stock value would have certainly been a much rockier boat.
Pokémon GO is not the only example of investor ignorance, nor will it be the last. The simple reality is that investors are often neither calm nor collected, and they often take part in buying and selling frenzies in order to get a piece of the pie when an investment is hot before trying to get out when the investment appears to sour. Entire market bubbles and crashes are created from this herd mentality: recall the tulip mania of the 1600s, the millennium’s dot-com bubble, the Beanie Baby bubble, the 2007 housing crisis, etc. This isn’t even Pokémon’s first bubble, as Millennials will remember that the Pokémon cards we used to collect could be sold for hundreds of dollars if they were rare or holographic. Obviously, the Pokémon card bubble burst because Millennials who kept their cards have a relatively worthless collection now.
There is a growing subset of economic study devoted to these kinds of phenomenon called behavioral economics. Traditional economics is essentially based on the idea that people are rational and sensible with their money in order to spend it toward that which gives them the greatest benefit. With this assumption, regular economists use mathematical formulas and statistics to try and understand the vast economy. Behavioral economists, in contrast, incorporate what we have learned about psychology to help explain why the economy works the way it does.
Behavioral economists begin with the premise that people are, in fact, not rational with their money. They often do illogical and even stupid things because people are emotional beings with oftentimes irrational brains. This is not necessarily people’s fault because the economy is huge, complex, and impossible to understand. Trillions of dollars going back and forth in an incompressible number of countries, businesses, and families with a myriad of differing laws and taxes creates a rather complicated system, especially when compounded by the reality that there is a seemingly infinite supply of consumers, manufacturers, and products.
Pokémon GO may be just one product, but behavioral economics helps explain how investors got it so wrong investing so much of their money in Nintendo. Sorry, conservatives, the free market isn’t intrinsically efficient.