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What ‘Gangnam Style’ can teach us about the Psy-chology of investing

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  • Correction:

    In the above video, Paul Solman mistakenly refers to Dimensional Fund Advisors as a hedge fund. It is not. The transcript has been corrected to reflect both the description of the firm and Eugene Fama's role with Dimensional.

  • GWEN IFILL:

    Now economics correspondent Paul Solman examines how viral music videos, television interviews, and good looks can boost a company's stock price.

    It's part of our ongoing reporting Making Sense, which airs every Thursday on the NewsHour.

  • PAUL SOLMAN:

    Pop quiz.

    What do the following have in common, the 2012 hyper-viral video sensation "Gangnam Style, the hottest, sexiest CEOs alive, the 2013 Nobel Prize in Economics?

    To help answer that question, and a deeper one about the rationality of the stock market, we went to the recent meeting of the American Economic Association in Boston, where, among hundreds of presentations, one in particular had caught our attention.

  • ANDY KIM, Sungkyunkwan University:

    So you're gripping this horse, right?

  • PAUL SOLMAN:

    Oh, the reins.

  • ANDY KIM:

    And then you're ready to…

  • PAUL SOLMAN:

    That's the key equestrian dance move in "Gangnam Style," the Korean pop video watched so many times online, now over 2.2 billion, that YouTube had to rejigger its views counter.

    After the video went viral, economist Andy Kim, who dressed up playfully, "Gangnam Style," to present his paper, noticed some weird activity in the stock price of a publicly traded South Korean semiconductor firm, DI Corp.

  • ANDY KIM:

    Market efficiency would say the price of this stock has to stay calm, because there was no fundamental information about this company, but only with this "Gangnam Style" being viral, the stock started to jump up 800 percent level within three months.

  • PAUL SOLMAN:

    Eight hundred — it multiplied eight times?

  • ANDY KIM:

    Yes, eight times.

  • PAUL SOLMAN:

    Market efficiency is the theory for which University of Chicago economist Eugene Fama shared the Nobel Prize in 2013.

  • EUGENE FAMA, Nobel Laureate, Economics:

    The central question is whether asset prices reflect all available information, what I label the efficient markets hypothesis.

  • PAUL SOLMAN:

    The idea is that stock prices always reflect true value because investors take in all available information about companies almost instantly and thus bid them up or down to their true worth.

    But with DI Corp and its 800 percent price jump, there was only one even remotely relevant bit of information. The company's executive chairman, Park Won-ho, is father of Park Jae-sang, AKA tongue-in-cheek rap star Psy.

    Like son, like father, inexplicable success.

    So, no merger talk? No nothing?

  • ANDY KIM:

    No mergers. No earnings surprise. No announcement about M&As or new business. Nothing.

  • PAUL SOLMAN:

    In other words, the stock price of DI Corp took off in tandem with the CEO's son simply because his video went viral, and investors got excited, a stock bubble if ever there was one, except the Nobel theory said bubbles don't exist.

    Was there any way to strengthen the case that they do?

    Well, "Gangnam Style" happened to have spawned a cottage industry of parodies, from Eastern Europe, Saudi Arabia, NASA's Johnson Space Center, even the Chinese dissident artist Ai Weiwei. And then there were flash mobs, from Bangkok to Barcelona, from a Budapest shopping mall to a Philippine maximum security prison.

    Economist Kim wondered, could it possibly be that when these videos anywhere from Italy to Indonesia went viral, or even just bacterial, in their home country, would the dad's stock price go up there? Take a guess.

    You mean people were actually buying the stock of the father of Psy in "Gangnam Style" because there were flash mobs in their area?

  • ANDY KIM:

    Yes. That's what I'm documenting in this paper.

  • PAUL SOLMAN:

    And though DI Corp's stock price eventually subsided some, it soared again with the release of Psy's second hit song, "Gentleman," in April 2013.

    Though the company's earnings remain pretty much where they were pre-virus, the stock still hovers 400 to 500 percent above where it started, and, says Kim:

  • ANDY KIM:

    Whenever people are anticipating Psy's new songs coming up, the price shoots back up again to that 800 percent level.

    DANIEL S. HAMERMESH, Royal Holloway University of London: That's an immense effect. That has got to be a true bubble, as we call it, irrationality.

  • PAUL SOLMAN:

    Economist Dan Hamermesh, from whom we will hear more in a moment.

    But we have to set him up with Andy Kim's second piece of irrationality research.

  • ANDY KIM:

    We study 7,000 CEO interviews on CNBC, the financial network, and what happens to the stock price when the CEO comes onto the CNBC and does an interview, we see price jump on the day of the interview — interview, and then reverse, goes backward over the next 10 trading days.

  • PAUL SOLMAN:

    Back to where it started?

  • ANDY KIM:

    Back to where it started. Popping up part is irrational, and then getting back to original level, it's market efficiency.

  • PAUL SOLMAN:

    So it's irrational to buy stock in a company when its CEO goes on TV, given no actual news about the company, right? But what if the CEO is as good-looking as Tesla's Elon Musk, number one on Business Insider's list of sexiest CEOs? Or Yahoo! CEO Marissa Mayer, who saw her stock price jump 1.25 percent the day her "Vogue" magazine feature came out?

    Mayer scores an 8.45 out of 10, just five-hundredths of a point lower than Angelina Jolie, on Anaface.com's facial attractiveness index. That's the Web site two Wisconsin researchers used to judge the hotness or not-ness of 682 CEOs. They found that the better looking the CEO, the bigger the boost to the company's stock price when he or she took over.

  • MAN:

    Attractiveness affects people's perceptions.

  • PAUL SOLMAN:

    Crazy. Or maybe not, says Dan Hamermesh, who's been studying the economics of beauty for over 20 years.

  • DANIEL S. HAMERMESH:

    If the CEO is better looking, he or she is going to generate more confidence by the co-workers, by the subordinates. And that's going to help the company make more sales, make more profits. And those profits are going to be reflected in the higher stock price. So it's completely comprehensible, very rational, given that you think we have a preference for good-looking people, which I know we do.

  • PAUL SOLMAN:

    And it's rational to bet on beauty being more than skin-deep?

  • DANIEL S. HAMERMESH:

    Rational only in the context of a discriminatory society, which values beauty. It's the underlying discrimination that I think is irrational.

  • PAUL SOLMAN:

    So, in the end, are markets efficiently rational or aren't they? Or are they both? Isn't it rational to believe that investors can take a fancy to a knockout CEO or a company that gets sudden attention, for whatever wacky reason, so long as those investors think other investors will do the same?

    And that brings us back to Psy, the stock of his dad's firm, and the most supposedly rational market players of all, the world's institutional investors.

  • ANDY KIM:

    Institutional investors from abroad started to buy this stock even more. And then guess what? Dimensional Fund Advisors, whose investment approach is based on the work of Nobel Laureate Eugene Fama, is now the largest institutional investor.

  • PAUL SOLMAN:

    Now, wait. You mean that the privately-held investment firm most associated with the efficient market hypothesis that price always reflects fundamentals…

  • ANDY KIM:

    Right.

  • PAUL SOLMAN:

    … is the largest investor in "Gangnam Style"'s father's company?

  • ANDY KIM:

    Yes. They may have different investment style. I guess that style must be "Gangnam Style."

    (LAUGHTER)

  • PAUL SOLMAN:

    Or the style that says, if you can't beat them, it's perfectly rational to join them.

    Paul Solman, reporting for PBS, NewsHour-style.

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