Price variation for rare coins

[guamit]

Hello All,

There is something I wanted your opinion on. How do you price rare coins?

For me if two coins are equally rare then their price should be same. However, in practice I have seen that it is dependent on whether it is a rupee coin or a half rupee coin or a quarter anna coin.

e.g. for me a 1911 1/4 anna in UNC condition is as rare as 1897 half rupee in UNC condition, however the half rupee will always sell for substantially more. (maybe a bad example but I hope you get the point)

1. Have you noticed this as well?
2. If yes, why is it so?

Thank you!

~guamit

[PeaceBD]

How do you decide which one is rare of the 1911 1/4 Anna and the 1897 1/2 rupee? Some one who is buying the 1897 1/2 rupee at a higher price definitely knows which one is rarer of the two coin. Not just that there are many different things which affect the value of the coin like its grade, eye appeal, popularity of the series. Even two 1911 1/4 anna in approximately same grade might be valued differently as no two coins are exactly similar.

[Figleaf]

In simple economic theory, there is a model that depends on supply and demand curves that intersect at a point where an equilibrium exists between supply and demand, yielding an equilibrium price and quantity. In practice, this model hardly ever exists. It is mostly an analytical tool, not a tool to explain price formation in practice. In most cases, price formation is way more complicated.

There are no rare BI coins. A few coins are scarce (I prefer "hard to find"). Most coins are common. Yet, even the most common BI coins are not offered in circumstances in which the supply/demand curve model works. Prices are rather formed by individual emotional factors, such as "how badly do I want this coin" or "do I think this coin will not sell readily in the future".

One of these emotional factors is called anchoring. This effect works heavily in coins trading, e.g. Krause Mishler catalogue quote is $5 means I will not pay $25 and I will not offer the coin for $2. If I offer the coin for $4 and it doesn't sell for three years and KM still lists it at $5, the seller, especially the non-pro seller, most often decides not to change the price. The catalogue quote serves as an anchor that determines the price, not the other way around. Demand and supply have no influence.

Forty years ago, two non-collectors (both wanted to make replicas) fought over a Dutch coin in a high profile auction. Between themselves, they drove up the auction price to 6 times what it was before. That coin is still not offered below that anchor, but seldom sold at that price, even though its catalogue quote is still the forty year, completely irrelevant old outlier price.

In other words, historical prices are a guide to the fear and greed of individuals, not a guide of value.

Peter

[Pellinore]

Naturally, there are many factors contributing to a coin's price: metal (in this case, a modern silver coin is better than a comparable bronze coin), popularity (I don't know much about BI coins, but a larger coin of more interesting design, with a famous queen instead of one of many kings).

And Peter's quite right, I didn't know the word was anchoring, but that's the effect of prices plugged in catalogs. People know that a certain coin used to cost 100 dollars, twenty years ago, so when they see it for 200, they won't buy it, even if inflation makes this the same value.

Sometimes, a seller offers a coin in a catalogue for an astronomic price. That can settle a measure for many years: other sellers will ask 80 or 90 % of that price and hope they sell. But they won't.

I think, if you really want a really rare coin, you shouldn't care about anchors or other people's ideas, you just pay the max you can spare. That idea helped me a lot in various auctions: the result is that after I won the auction, I'm quite content with the coin. After a while I don't feel the hole in my purse anymore, and then I am a really happy man.   
-- Paul

[aarkay]

Hi….

Small doubt…a question I have…does the rarity of a coin determined by the Buyer or by the Seller or Market Opinion…also why does one buy a rare coin…as an investment or for emotional contentment…

Aarkay

[Figleaf]

Whether a coin is scarce or not is determined by catalogue makers. There is no perfectly competitive market in the economic sense* as the number of transactions is way too small. The only exceptions may be common US small cents and modern Japanese 10 yen pieces.

Those who buy coins for investments know nothing about investments. Investments is a question of balancing return and risk, not a question of optimising return. The retail investor who ignores risk ends up going into the riskiest asset classes, which may occasionally lead to very good results in the short term, but more often leads to heavy deception. So it is with coins. They are a top risk asset class (risk is usually measured by volatility, but in the case of an asset class such as coins, you may add liquidity and difficulty to evaluate), unsuitable for capitals of less than €100 billion and questionable even at that level. Compounding the unattractiveness of coins for retail investors is the fact that they have no idea of the effect of compound interest rate, looking only at the difference between purchase and sell price, without taking time into account.

Some buyers buy for investment. I would argue that only those buying for emotional reasons are true collectors. People who want to study coins, whether they are common or scarce. People who strive for completeness, rather than return. People who sell because they have upgraded or are specialising, not because they can get more money for a coin than they paid for it, but who are more likely to trade or give away than to sell.

Peter

* Defined as an environment where i.a. no participant has an influence on the price, even when buying or selling in large quantity and all participants having full knowledge of all relevant information.

[aarkay]

Whether a coin is scarce or not is determined by catalogue makers. There is no perfectly competitive market in the economic sense* as the number of transactions is way too small. The only exceptions may be common US small cents and modern Japanese 10 yen pieces.

Those who buy coins for investments know nothing about investments. Investments is a question of balancing return and risk, not a question of optimising return. The retail investor who ignores risk ends up going into the riskiest asset classes, which may occasionally lead to very good results in the short term, but more often leads to heavy deception. So it is with coins. They are a top risk asset class (risk is usually measured by volatility, but in the case of an asset class such as coins, you may add liquidity and difficulty to evaluate), unsuitable for capitals of less than €100 billion and questionable even at that level. Compounding the unattractiveness of coins for retail investors is the fact that they have no idea of the effect of compound interest rate, looking only at the difference between purchase and sell price, without taking time into account.

Some buyers buy for investment. I would argue that only those buying for emotional reasons are true collectors. People who want to study coins, whether they are common or scarce. People who strive for completeness, rather than return. People who sell because they have upgraded or are specialising, not because they can get more money for a coin than they paid for it, but who are more likely to trade or give away than to sell.

Peter

* Defined as an environment where i.a. no participant has an influence on the price, even when buying or selling in large quantity and all participants having full knowledge of all relevant information.

Hi Peter…

Thanks for your scholarly professor like explanation as to why people collect coins (or for that matter stamps too)…..WOW….wonder  how you could beautifully respond to my simple doubt…wish I had this fluency to explain.....  once again thanks for your effort… ..

Aarkay

[Pabitra]

Investments is a question of balancing return and risk, not a question of optimising return.

Maximising return for a given risk appetite OR minimising risk for a desired return is called optimisation.
Once you build up risk reward curve for a given market, your travel on it defines your investment.
Pleasure of holding a beautiful coin ( beauty lies in then eyes of beholder) is part of non financial return. The actual psychological value of it is linked to your net worth. It is true for all antiques, works of art and other collectibles.

[aarkay]

Maximising return for a given risk appetite OR minimising risk for a desired return is called optimisation.
Once you build up risk reward curve for a given market, your travel on it defines your investment.
Pleasure of holding a beautiful coin ( beauty lies in then eyes of beholder) is part of non financial return. The actual psychological value of it is linked to your net worth. It is true for all antiques, works of art and other collectibles.

HI...

This also is termed as Opportunity Cost in Economics…In microeconomic theory, the opportunity cost of a choice is the value of the best alternative forgone, where a choice needs to be made between several mutually exclusive alternatives given limited resources.…that is…OPPORTUNITY COST IS WHAT A PERSON SACRIFICES WHEN THEY CHOOSE ONE OPTION OVER ANOTHER....but seldom for emotional purchases like coins this factor is very often overlooked..

Aarkay

[mitresh]

I collect simply for the joy and beauty of Indian coins which I can afford within my budget. I don't think about RRRRs - risk, reward, return, rarity. A battered ancient copper gives me same joy as a UNC Mohur. I do have my own personal favorites but overall I don't differentiate between any coin based on its metal, age, condition etc. Each and every individual coin gives me equal pleasure. The fun is studying and researching them, analysis and interpreting them, simply gazing and marveling at them, and gaining nirvana in the process.

Buying for investment, and many indeed do, is not a good idea as all asset classes, across markets, go up and down based on many factors viz popularity, new finds, changing tastes and preferences, market rigging etc. An investor may lose interest if the value of his holding declines but a collector is indifferent because price benchmark at any given point of time that doesn't bother him in both relative or absolute terms.

For me personally, the joy of collecting is based on the inherent and underlying knowledge you gain that far outweighs monetary consideration. If I get the coin I want, I feel blessed but don't fret over it if I lose as the quest continues. Que sara sara.......to each his own I guess.

Happy collecting.

[Figleaf]

Sorry Aarkay, didn't want to be overbearing, but I do think hat if science provides good answers, we should not cling to simple myths.

Pabitra refers to the efficient frontier theory, formulated by Harry Markowitz (I met him in 2001- it doesn't seem so long ago). Harry got a Nobel prize out of that. Totally deserved, but it's the same story as with simple supply and demand curves in a perfectly competitive market: it's an analytical tool for teaching without much practical value.

Its major flaws are that you are supposed to know future returns of individual equity or asset classes (if I knew that, I could have beaten Bill Gates in amassed capital by now) and being unstable. The modern portfolio theory model will recommend a lop-sided portfolio with preferred stock and change recommendations radically when you change some of the (highly uncertain) estimates.

Mind that none of this has anything to do with coin collecting. Mitresh got that right. His post bears re-reading. One more thing: "emotional" is not judgemental. It is neutral and descriptive. Emotional is just how we generate joy and sorrow. Normal people need both for a balanced life.

Peter

[guamit]

Thank you, all! Great thoughts.

I think I have my answer from reading all your posts. Yes, the price I would pay will depend on how badly I want the coin and how much I can afford. It will not depend on whether it is silver or copper i.e. personally i will not 'anchor' it to historical figures. To each his own I guess.

But 'anchoring' does explain how prices vary for these coins. Paul thanks for introducing us to the term.

~guamit

[aarkay]

Hi…

I think Mitresh has hit the nail on its head…any hobby including Coin collecting is pursued for the pleasure it gives to the collector… rightly RRRs - risk, reward, return, rarity has got nothing to do with the purchase…I have experienced any hobby( though my main hobby is Philately) is a great stress reliever…investment/returns does not come into the picture at all….budget or affordability is the main consideration….in Marketing Management it talks about Consumer Behavior where emotional buying by Customer is highlighted…there could be no rhyme or reason for such a purchase and it varies from individual to individual…Peter you have rightly mentioned  such a purchase is  "emotional" and is not judgemental…..each one to his or her own perception  of importance…

Thanks Mitresh and Peter for your posts…happy to interact…


Aarkay