Thursday, December 5, 2013

Get your lack of money for nothing, and your lottery tickets for free

I've come to the conclusion that a large amount of existence of small local bands can be explained by option value.

The bands themselves exist because of the out-of-the-money option that they’ll strike it big and become the next U2. In the meantime, they’re playing in tiny venues to small crowds of people, and making no money. I have no particular stats on that, but plausible McKinsey job interview style estimates of revenue from a 200 person show suggest that even if the margin is really high, hourly wages are going to be pretty damn low. Steve Levitt famously argued that there’s a reason the average drug dealer lives with his mum. To follow the same logic, there’s a reason that small bands on tour are looking to crash at random people's houses – they’re poor.

But perhaps less appreciated is that option value probably explains a lot of the audience presence too. Their option is that maybe if the band becomes big then they’ll be able to boast that they heard them first and listened to them in a tiny venue for no money before anyone knew about them. The more insufferable ones will also go on to complain about how they were much better before they sold out. I have a family friend who once went to a concert in Liverpool in the sixties that featured both the Beatles and Gerry and the Pacemakers before either of them were big. (Apparently the concert cost £1 to attend, or something equally hilarious). It’s a pretty rad story. But you’re going to listen to a lot of no-name bands before you hear the next Beatles.

Sure, some people just like live music, and prefer small venues, and want to support small acts, and actually just enjoy that type of music. But those are boring and obvious hypotheses. Freakonomics taught me that when you really understand the world, the truth will always turn out to be both hilarious and counterintuitive, in a way that makes for great cocktail party conversation.

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