Tuesday, March 1, 2011

The Economic Theory of Superstars -- Adler's Alternative Theory

The nice thing about the web is that space is unlimited. (Time? Not so much). And so, if it it would have been possible for me to write an ROB Mag column that was twice as long (see the previous post) I would have introduced the major critic of Rosen's Superstars theory: an economist named Moshe Adler. Adler, in his paper "Stardom and Talent," agrees that there are superstars, and he agrees with Rosen as to the mechanism by which they make all of that money, but he disagrees that the process is always "rational." He thinks that consumers can be mistaken. Frequently.

Consider: Lady Gaga is not necessarily an objectively better musician than, say, some 26 year old who just completed a master's in performance at Berkelee College of Music.

But she is more popular. And Adler argues that "better" and "more popular" aren't always the same thing. (In Rosen's original theory, it seems to be assumed that one is "more popular" because one is "more talented" and "better") Lady Gaga, says Adler, may be more popular because, well, she's more popular. People like to consume the same thing as their peers, they move in packs, they engage in herd behaviour, etc. Trauber, the i-banker in my column is certainly a "more popular" investment banker, but is he better? Is he smarter than the other i-bankers? That's a reasonable question. Ditto for Lady Gaga. The Adler theory says that she's more popular in part because she's, well, more popular.

Rosen is basically the market-is-efficient version of the economic theory of superstars. And Adler is the market-can-often-be-inefficient version of the theory. Both say that you are going to have superstars, but the latter says that there are times when there's nothing rational/efficient about it. People buy a lot of one superstar product because they believe it is better, but that belief may not be true. That applies to anyone who has ever invested money with a star money manager. Or anyone who ever bought a popular stock that every analyst recommended.

There's a good blog post here on David Beckham as an Adler superstar: he gets hired by the LA Galaxyand paid so much because he's David Beckham and can generate buzz, interest, media coverage, etc, NOT because he is objectively the best football player in the world, but rather the most popular and best know player in the world. He's a celebrity. The team is paying him umpteen million dollars a year because they hope his celebrity can put bums in seats, while at the same time people may be putting their bums in the seats because they mistakenly believe that he is the best player in the world. In other words, sales/marketing/branding can triumph over hard mathematical facts. To which the average person would reply: duh. 
It sometimes takes a lot of brainpower to explain the obvious.


  1. Popular music can stay irrational longer than you can stay patient ;)