Day 4: Keynesian Beauty Contest

Today, as I indulged in a friendly game of poker (with no real money, of course!) with my roommates, I was hyper-aware of the level of wits that this mere card game truly entailed. I couldn't simply make a naïve move, but I had to think about what my opponents would play in order to calculate my move. Deeper into the game, I began thinking about what my opponents thought about what I would do, and I based my move on that. This opened my eyes to how Keynes's popular Beauty Contest theory was so diverse in its applicability. 

Keynes had come up with this perfect analogy to represent the inner-working of the stock market and to give an explanation for its volatility. "Successful investing is anticipating the anticipations of others." Thus, in the chess game of speculative markets, you win not by picking the soundest investment, but by picking those that are bid up higher by others in the same game.

However, bounded rationality of individuals can be a major deterrent to this clear-cut formula of success. How should a rational player behave in a world where not every player is perfectly rational? Perceptions of value can lead to irrational fluctuations in rational systems. Though this process creates uncertainty, we are all still entrapped in this intricate Beauty Contest and must forever keep guessing (and guessing our guesses too!)