A Keynesian beauty contest is a concept developed by John Maynard Keynes and introduced in Chapter 12 of his employment, The General Theory of Employment, Interest and Money ( 1936 ), to explain price fluctuations in fairness markets. It describes a smasher contest where judges are rewarded for selecting the most popular faces among all judges, quite than those they may personally find the most attractive .
overview [edit ]
Keynes described the legal action of rational agents in a market using an doctrine of analogy based on a fabricated newspaper contest, in which entrants are asked to choose the six most attractive faces from a hundred photograph. Those who picked the most popular faces are then eligible for a trophy. A naive strategy would be to choose the face that, in the opinion of the entrant, is the most fine-looking. A more advanced contest entrant, wishing to maximize the chances of winning a prize, would think about what the majority perception of attractiveness is, and then make a choice based on some inference from their cognition of public perceptions. This can be carried one step further to take into account the fact that other entrants would each have their own public opinion of what populace perceptions are. therefore the strategy can be extended to the next order and the next and therefore on, at each degree attempting to predict the eventual consequence of the process based on the reasoning of other rational number agents.
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Reading: Keynesian beauty contest – Wikipedia
“ It is not a case of choosing those [ faces ] that, to the best of one ‘s sagacity, are truly the pretty, nor even those that average impression truly thinks the pretty. We have reached the third gear degree where we devote our intelligences to anticipating what average opinion expects the average public opinion to be. And there are some, I believe, who drill the fourth, one-fifth and higher degrees. ” ( Keynes, General Theory of Employment, Interest and Money, 1936 ) .
Keynes believed that exchangeable behavior was at work within the livestock market. This would have investors pricing shares not based on what they think an asset ‘s fundamental value is, or flush on what investors think other investors believe about the asset ‘s value, but on what they think other investors believe is the average opinion about the value of the asset, or even higher-order assessments .
example contests [edit ]
In 2011, National Public Radio ‘s Planet Money tested the hypothesis by having its listeners select the cut of three animal videos. The listeners were broken into two groups. One selected the animal they thought was cutest, and the other selected the one they thought most participants would think was the cutest. The results showed meaning differences between the groups. Fifty percentage of the first group selected a video with a kitten, compared to seventy-six percentage of the moment selecting the lapp kitten video. Individuals in the second group were by and large able to disregard their own preferences and accurately make a decisiveness based on the expected preferences of others. The results were considered to be consistent with Keynes ‘ theory. [ 1 ]
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References [edit ]
- The State of Long-Term Expectation, Ch 12. General Theory of Employment Interest and Money