Keynes’ beauty contest

28 Mar, 2018 at 19:55 | Posted in Economics | 2 Comments

beautyProfessional 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 judgement 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. And there are some, I believe, who practice the fourth, fifth and higher degrees.

J M Keynes General Theory

Still the best description of the logic of financial markets. Professional money management is at heart a guessing game where investors try to guess what other investors guess about other investors guess about the future …


  1. It’s turtles all the way down …

  2. Insurance changes the picture, because you can hedge your guesses and come out ahead no matter what. The risk becomes how much you will profit, not whether you will profit. Matched-book dealers can deal in huge volumes in the tens or hundreds of trillions of dollars (see OTC derivatives: and insure against psychological risks such as a sudden devaluation of Mortgage-backed securities, for example. When the insurance piece broke in 2008, the Fed proved it can fill the role of insurer, guaranteeing enough liquidity as a replacement for frozen private markets to rescue the world financial system …

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