Posted by Workbook on 09/15/2011 — Filed under:
Features, Headline, Illustration, Musing On
Richard Borge provided the above illustration for the recent New York Times article by Robert J. Shiller. The article discusses the recent stock market volatility and supplies reasoning that incorporates John Maynard Keynes and beauty contests. Here's a snippet:
"Why did investors react so strongly to the rating change, which, after all, was merely the opinion of a few analysts on a committee? And why did the market swing so much day to day, even when there was no significant news?
John Maynard Keynes supplied the answer in 1936, in “The General Theory of Employment Interest and Money,” by comparing the stock market to a beauty contest. He described a newspaper contest in which 100 photographs of faces were displayed. Readers were asked to choose the six prettiest. The winner would be the reader whose list of six came closest to the most popular of the combined lists of all readers.
The best strategy, Keynes noted, isn’t to pick the faces that are your personal favorites. It is to select those that you think others will think are prettiest. Better yet, he said, move to the “third degree” and pick the faces you think that others think that still others think are prettiest. Similarly in speculative markets, he said, you win not by picking the soundest investment, but by picking the investment that others, who are playing the same game, will soon bid up higher."
You can read the full article
HERE
Richard Borge's Portfolio