Why do people pay exorbitant prices for a 1963 Ferrari that is permanently parked in a garage, a bottle of Bordeaux that sits in a cellar, or even a rare Picasso that just hangs on the wall?

The obvious answer is that these things provide something beyond mere financial value. Their owners derive pleasure, status, identity, nostalgia, and perhaps most importantly, the satisfaction of ownership itself from these assets. 

In other words, they provide an emotional return, and with all the cash flooding into red-hot investment sectors like AI, the effect might not be limited to collectibles. 

A fascinating new paper by Elroy Dimson, Kuntara Pukthuanthong and Blair Vorsatz puts a number on this phenomenon. The authors call it emotional yield — the non-financial utility investors receive from owning an asset — and their findings have some interesting implications for investors well beyond the world of collectibles.

The researchers examined 30 return series across 13 categories of collectibles, including paintings, stamps, coins, wine, jewelry, classic cars, and violins, with some data stretching back as far as 110 years. They then constructed factor-mimicking portfolios using stocks and bonds to estimate how much of the collectibles’ returns represented financial compensation versus something else.

The results are striking

Twenty-four of the 30 collectible return series had positive estimated emotional yields. The average was 2.64 percent per year, with a median of 2.53 percent. In other words, the pleasure of owning these assets appears to have been worth roughly 2.5 percent annually to their owners.

Since investors receive something besides financial returns, they are willing to accept lower equilibrium financial returns. This research showed that assets with positive emotional yields have lower expected financial returns than otherwise similar investments. 

Emotional yield isn’t free

This makes intuitive sense. If I get 2.5 percent of my return from enjoying the painting hanging on my wall, I don’t need it to generate the same financial return as an asset that sits unseen in my portfolio.

The effect is consistent with research on scarcity driving desirability, including the famous cookie experiment. 

In 1975, psychologist Stephen Worchel ran an experiment on 200 undergrads using chocolate chip cookies. The participants were placed into one of two groups — one was presented a jar with ten cookies in it; the other group’s jar held just two cookies. 

The cookies were identical — same recipe, same chocolate chips, same cookies. However, the subjects in the two-cookie group rated their cookies as much more desirable than those with ten. 

Interestingly, when the ten cookie group had its jar taken away and replaced with the two-cookie container, the subjects rated the two cookies even more highly than the group that started with two! 

Scarcity, all else being equal, makes things more desirable, and owning those coveted items costs us the emotional yield; it’s literally the price of feeling good about what you own. 

Which brings me back to AI

It is hard to think of an investment category with more emotional yield today than late-stage AI venture capital. AI is not simply another technology investment; it represents technological progress, economic transformation, and the possibility of a better future — and all the positive feelings associated with that. 

There is the intellectual excitement of being involved in something transformative. There is the signaling value of investing alongside the smartest people in technology. There is prestige and the fear of missing out. There is access and scarce capacity often mixed in. And, perhaps most importantly, there is the ability to tell people that you own a piece of the thing everyone believes will change the world.

None of this means AI is a bad investment. Indeed, some of these companies will likely change the world and become enormously valuable. However, the research on emotional yield suggests something more subtle: the greater the non-financial benefits of ownership, the more investors are willing to pay today, and the lower expected returns may be tomorrow.

This phenomenon is hardly unique to AI. History is filled with periods when investors eagerly paid a premium for assets that conveyed status, excitement, or the promise of belonging to the future. Railroads, radio, the Nifty Fifty, internet stocks, clean tech, NFTs, and meme stocks have all, at various times, carried an emotional dividend alongside their financial prospects.

But the opposite of an investment with high emotional yield is an investment nobody wants to own, and this is where things get interesting for private market investors.

If markets tend to overvalue what is admired and undervalue what is ignored, then the assets which may be most likely to generate excess returns are often those that are complex, unpopular, operationally difficult, or simply uninteresting. They are hairy, messy, and unloved.

If emotional yield functions like an invisible dividend, then excess financial returns may often be found where emotional returns are absent or even negative. Investors earn a premium for owning assets that others do not enjoy owning.

Distressed companies, niche industries, complicated restructurings, and overlooked corners of private markets rarely inspire excitement. No one boasts at a dinner party about owning an obscure asset-backed specialty finance business. Few investors derive emotional satisfaction from operational turnarounds or neglected sectors.

The future may very well belong to artificial intelligence. But the best investments are not always found where enthusiasm is highest. Markets reward excitement less often than investors imagine. More often, they reward discomfort.

The next time an investment makes you feel particularly good about owning it, it may be worth asking a simple question:

How much am I paying to feel good?

Chris Schelling, an author, advisor, and investor, is an expert at incorporating insights from behavioral finance into investment decision making. Most recently, Chris was a managing director on the Pan-Alts team at Aksia, providing customized investment recommendations and research.