This is part of a series of articles in the Gazette where we look at some principles and phenomena of physics, economics and nature and see how they apply/translate into the world of NFTs. The previous one was the Pareto principle in cryptoart.
What is the Lollapalooza effect?
From a quick wikipedia search we get this:
Charles Thomas Munger (born January 1, 1924) is an American billionaire investor, businessman, former real estate attorney, architectural designer, and philanthropist. He is vice chairman of Berkshire Hathaway, the conglomerate controlled by Warren Buffett; Buffett has described Munger as his closest partner and right-hand man. Munger served as chairman of Wesco Financial Corporation from 1984 through 2011. He is also chairman of the Daily Journal Corporation, based in Los Angeles, California, and a director of Costco Wholesale Corporation.
Munger uses the term "Lollapalooza effect" for multiple biases, tendencies or mental models acting in compound with each other at the same time in the same direction. With the Lollapalooza effect, itself a mental model, the result is often extreme, due to the confluence of the mental models, biases or tendencies acting together, greatly increasing the likelihood of acting irrationally.
During a talk at Harvard in 1995 titled The Psychology of Human Misjudgment, Munger mentions Tupperware parties and open outcry auctions, where he explained "three, four, five of these things work together and it turns human brains into mush," meaning that normal people will be highly likely to succumb to the multiple irrational tendencies acting in the same direction. In the Tupperware party, you have reciprocation, consistency and commitment tendency, and social proof. (The hostess gave the party and the tendency is to reciprocate; you say you like certain products during the party so purchasing would be consistent with views you've committed to; other people are buying, which is the social proof.) In the open outcry auction, there is social proof of others bidding, reciprocation tendency, commitment to buying the item, and deprivation super-reaction syndrome, i.e. sense of loss. The latter is an individual's sense of loss of what he or she believes should be (or is) his or hers. These biases often occur at either conscious or subconscious level, and in both microeconomic and macroeconomic scale
“Really big effects, lollapalooza effects, will often come only from large combinations of factors” - Charlie Munger
Here are some extra material on the topic from other sources: www.livewiremarkets.com/wires/remuneration-a-96-year-old-a-music-festival medium.com/lessons-from-history/lollapalooza-effect-charlie-mungers-great-insight-into-how-humans-really-behave-c280ea034bd3 Full Harvard speech
Simplified , basically the idea is that when many biases combine from many sources the brain turns into a mush and is prone to misjudgement. There are different ways this effect can play out or the influence of it with Munger mentioning 2 distinct examples which normal people will be highly likely to succumb to: the ’’Tupperware parties’’ and outcry auctions. Although the examples are vastly different the effect is present and individuals are most likely to succumb and make poor decisions under these conditions.
Having covered the main concept of this behavioral chaos, it’s easy to start translating that into what we already know about NFT markets and the massive FOMO phainomena we see around us daily.
Having multiple sources transmitting info about many things for many reasons at the same time is exactly what is happening in NFTs. This in turn creates the perfect conditions for mushy brains, which lead to misjudgement, partnered with FOMO and possible missed gains, then the result we experience is a massive hysteria all around for specific items at specific times, with individuals transmitting biases to all directions for many things and different reasons. If you are wondering why the project you bought went below minting price and you see everybody celebrating 100 eth sales, but you get nothing, that makes you feel bad and FOMO to everything so you don’t miss the next moonshot, however there comes a time where you are experiencing some buyer fatigue, or maybe even a night’s sleep, and come back to the grind and you have missed the pump that you have been chasing. Sound familiar? No it’s not your dumb luck, it’s the lolapalloza effect in full swing.
Another instance where we experience the lollapalooza effect in general on NFTs and crypto , is right after something releases. Almost all projects that sell out carry some strong price action right after they sell and then enthusiasm dies down, or any coin making it into Binance or Coinbase, still pumps.
The outcry auctions example that is mentioned, is very similar to influencer and celebrity NFTs, where a lot of people have no interest about the actual product they are buying, they just ‘’buy it for the pump, dude’’. In this case we can see multiple biases and other buyers feeding that mentality and leading to misjudgement.
Maybe in some cases after something pumps something similar comes out which is a clear imitation, but people will still flood to buy it because of the pain they experienced when the first asset pumped and they missed the boat.
Another way the same example plays out is on auctions where the social gratification for a high price tends to send bidders on a hype frenzy.
On the opposite side of the spectrum we have tupperware parties, which can roughly translate to Discord servers, Telegram groups, Clubs and in general all the places that give a sense of belonging and community. The tupperware parties example is observed within these communities where social views and biases of more flamboyant members seem to be cutting through the noise easier.
The concept of the Lolapallooza effect is ethereal in its nature and conception. It can be learned and observed by the critical thinker and in many cases taken advantage of or help avoid a nasty situation. Some tweets are always surfacing about projects that people were buying strictly because of how much they liked them with no intention of gaining profits, but in the end these projects paid the best. So next time you find yourself mentally locked to a shitty drop that you don’t really like or understand, ask yourself is this lollapalooza effect and am i right in the middle of it?