economics game theory

1. KEYNESIAN
BEAUTY
CONTEST
By: Shih, Edbert
Siy, Madeleine

2. BACKGROUND
• Developed by John Maynard Keynes in 1936
• Entrants to choose a set of six faces from 100 photographs
• Everyone who picked most popular face was entered raffled for a prize
• Strategy was to pick not who you think is prettiest, but to pick you
think others will find prettiest

3. ANALOGIES
• Entrants= investors
• Faces= stocks of companies
• Raffle for Prizes= Chance to earn money

4. STOCK MARKET
• Investors care about what other investors will buy in the future. Here
you often pay more a firm is worth, because you think that somebody
else will pay even more later on.
• This strategy is sometimes called the” greater-fool theory,” because
even though you’re a fool to pay to as much as you did, you’re betting
that there’s a greater fool just down the road. And if you’re right, then
of course you aren’t being foolish.
* Sometimes prices rises because people expect them to rise.

5. ECONOMIC CONCEPT
• Much of investment is driven by expectations of other investors rather
than expectations about the fundamental profitability
• Potential investors ignore fundamental value (expected profitability
based on expected revenues and costs), instead investors try to predict
what the market would do
• Mostly evident in stock markets

6. RESULTS BASED ON CONCEPT
1. Investment is extremely volatile because fundamental value becomes
irrelevant.
2. Most successful investors are either lucky or masters at understanding
mob psychology.
3. Explanation for phenomena of stock market bubbles

8. SOURCES
• http://www.nytimes.com/2011/09/04/business/economy/on-wall-st-a-keynesian-beauty-
contest.html?_r=0
• http://www.economicsnetwork.ac.uk/sites/default/files/Ashley/6%20References%20f
or%20KBC.pdf