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Baseball cards provide test for financial theories in USF researcher’s study

As a kid trading baseball cards, Jared Williams spotted a few similarities between his hobby and his dad's career as a stockbroker.

"In the stock market, you obviously want to buy stocks that are going to perform well and sell the ones that are going to perform poorly," he said. "As a card collector, I tried to obtain cards that I thought would go up in value and trade away the ones I thought would go down in value."

As an assistant professor at the USF Muma College of Business, Williams is still interested in the similarities between baseball card trading and the stock market - but now, he's doing it as a researcher trying to explain complicated patterns and theories in finance.

"There are some patterns in the way stock prices move that are difficult to reconcile with standard finance theory," Williams said. "They're puzzling. We don't fully understand them."

One of these unusual patterns –one that Williams' recent study looks to understand using baseball card trading - is "momentum." Momentum is the tendency for stocks that have done well in the past to continue outperforming those that have done poorly in the past, and it's puzzling because the differences in returns are not obviously tied to risk. Risk, basic finance theory says, should be the only thing explaining why one stock can be expected to outperform another.

"You shouldn't be able to predict future abnormal returns. That's kind of Finance 101," Williams said.

There are several theories that try to explain why momentum exists. One of these theories says momentum arises due to gradual information dispersion. The theory says that new information about stocks isn't immediately available to everyone. It takes time to filter to traders, and thus to be reflected in the price. While this isn't the only theory that could explain momentum, it is the only one applicable in a baseball card trading market.

Williams and his fellow researchers looked at 38,000 baseball cards from 1948 to 1996, scanning 72 issues of Beckett's Monthly magazines to put together the most complete baseball card price data set on record. They compared retired players vs. active players to discover that gradual information diffusion could explain the momentum pattern: an active player's on-field performance in a given season could be used to predict that player's card price changes in the following year, which would not be possible if prices immediately incorporated the information. Retired players, with no new information available about their performance, exhibit much less momentum than the active players. It's the first time that the baseball card market has been linked to financial markets, Williams said.

The study also looked at a theory behind the underperformance of initial public offerings. In financial markets, once a stock goes public, returns are lower going forward. One explanation is that IPOs are priced by the most optimistic people, so they overestimate how well the stock will do.

Williams found support for that theory in the baseball card market, as well. When new baseball card sets come out, those sets converge toward a lower average valuation.

"It is difficult to assess a rookie's ability because he hasn't ever faced major league talent," Williams explained. "If cards' prices are determined by the most optimistic collectors, and if collectors' opinions are right on average, then new rookie cards should be overpriced compared to other cards. According to this theory, rookie cards should earn abnormally low returns in the first year or two after they are issued, which is what we find in the data."

While Williams clearly still finds baseball cards interesting, he said the mental energy he spent trading them growing up now goes toward his research.

"I still have the cards I had as a kid, but I don't collect anymore," he said.