Saturday, August 22, 2015

Keynes beauty contest in the NYTimes

Still very slow posting. Will pick up in September, I hope. Here a link to a game that is representative of what Keynes referred to as the beauty contest, which described the behavior of financial markets. Keynes original quote from chapter 12 of the General Theory says that:
"professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be."
So the game is not necessarily to pick up the number (in the NYTimes) that would follow from rational behavior. It's the number that the average person thinks the average person would choose.

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