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The Psychology of NFTs

Non-fungible tokens are confusing. Our obsession with them is even more so.

NFTs, or non-fungible tokens, are constantly in the news. But it is difficult to find anyone who fully understands what they are and how they work. And even those who do can't often explain why they work—what about our psychological setup makes us pay a lot of money to something that is pixel-by-pixel indistinguishable from something that is freely available.

Here is an unlikely way of explaining what NFTs are: From January 2-12, 1957, the French painter Yves Klein had an important exhibition at Galleria Apollinaire (on Via Brera), in Milan. The title of the exhibition was "Proposte monochrome, epoca blu" and the exhibited objects were eleven identical blue monochromes, all unframed, all 30 by 22 inches. But they were differently priced. In spite of Klein’s claim that all were sold immediately, in fact, only three were sold during the exhibition (Lucio Fontana purchased one of the three). But people bought the more expensive tokens of these indistinguishable paintings.

Yves Klein's exhibition was pure avant-garde provocation, but this is very similar to the way NFTs work. There is no such thing as an "original" when it comes to digital images or videos. The holiday picture on your laptop is pixel-by-pixel identical to the one that you uploaded to Facebook and that someone else may have downloaded. These images are not just similar, like Yves Klein's blue monochromes, they are strictly identical. There is absolutely no difference between the different copies or tokens.

And this is where NFT comes in. The creator of an image can have something like a digital stamp (technical details of how this works are less important) on one of these potentially infinite tokens. This then makes one of the many tokens special—different from all the others. It is still pixel-by-pixel identical to the others, but it has the digital stamp that makes it unique.

NFTs are probably here to stay: they provide a way for digital artists, but also photographers, filmmakers, and musicians, to retain some financial control in a medium where such control is easily lost, given that these works are very easily copied. Initially, only minor artists were drawn to NFTs, but more recently even heavy hitters like Quentin Tarantino started using them.

The most mysterious thing about NFTs is the psychology of what makes us pay a lot of money for something that is freely available. We can buy the NFT of an image or a song from the artist that is pixel-by-pixel identical to the one we can download for free (or for 10 cents). And the amounts involved can be exorbitant. Why would anyone do this?

Some of it is investment. Just as some investors put their money in original Rembrandts, some others buy NFTs. It may also give the buyer some cultural cache and bragging points. But this is not the full explanation. The full explanation likely has to do with something psychologists call "top-down influences on perception."

Two images may be pixel-by-pixel identical, but nonetheless, looking at one may feel very different from looking at the other. The reason for this is that perception is not fully determined by the visual input (which is identical in this case). It also depends on our beliefs and knowledge—for example, about what else we know about the image. So our perceptual experience is the result of a two-way interaction between the visual input and our background knowledge.

And looking at a free image may feel different from looking at an image that we know costs half a million dollars. So the NFT may be indistinguishable from the generic copy. But your experience of the NFT may still be very different from your experience of the generic copy. Whether this difference is worth half a million dollars is a different question.