Winning a Beauty Contest

In 1936 English economist John Maynard Keynes famously compared investing in the stockmarket to choosing the winner of a beauty contest.

Keynes described a newspaper contest involving photographs of the faces of 100 pretty women. Readers were asked to pick six women and a prize was offered to the reader whose list of six guesses came closest to the most popular guesses of all of the other contestants.

In a game like this the best strategy, Keynes said, isn’t to pick the faces that are your personal favourites. The best strategy is to select the faces you think others will think are the 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.

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Feature Image Credit: Paul Chin