In their book Animal Spirits, Akerlof and Shiller discuss The Delicious Apple as a metaphor for speculative investments. The apple used to taste good, but now it doesn’t. It’s still popular because it’s cheap and widely available. The same thing happens with speculative investments. People buy them because they think other people will buy them, not because they believe in the underlying asset. This can lead to a bubble, which can then burst, leaving investors with worthless assets. Here’s an excerpt from the book:
The Delicious Apple offers another metaphor for much the same theory. Hardly anyone today really likes the taste of the varietal now called Delicious.
And yet these apples are ubiquitous. They are often the only choice in cafeterias, on lunch counters, and in gift baskets. Delicious Apples used to taste better, back in the nineteenth century when an entirely different apple was marketed under this name. The Delicious varietal had become overwhelmingly the best-selling apple in the United States by the 1980s.
When apple connoisseurs began shifting to other varietals, apple growers tried to salvage their profits. They moved
the Delicious Apple into another market niche. It became the inexpensive apple that people think other people like, or that people think other people think other people like.
Most growers gave up on good taste. They cheapened the apple by switching to strains with higher yield and better shelf life. They cheapened it by clear-picking an entire orchard at once, no longer choosing the apples as they ripened individually.
Since Delicious Apples arc not selling based on taste, why pay extra for taste? The general public cannot imagine that an apple could be so cheapened. Nor does it imagine the real reason these apples are so ubiquitous despite their generally poor taste.
The same kind of phenomenon occurs with speculative investments. Many people do not appreciate how much a company with a given name can change through time, or how many ways there are to debase its value. Stocks that nobody really believes in but that retain value are the Delicious Apples of the investment world.
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