Investment Manager’s Report: A beautiful Mind Certainly, A beautiful Market… unlikely.
Keynes lamented on the tendency of markets to reflect changing investor psychology rather than the appropriate long-term yield on investments. This was famously summed up in his beauty contest analogy. It can be modelled into a game. Participants must choose a number between zero and one hundred. The winner selects a number closest to two-thirds of the average. E.g., if the average is 50, the winning number is 33. But wise guys, knowing how the game works, won’t stop there. No, why not two-thirds of 33, they reason. This process of backward induction concludes with rational people betting on the right answer being zero. This has become known as the Nash Equilibrium, after another famous economist and mathematician, John Nash. He was awarded a Nobel Prize for noting that efficient markets are typically drawn to absurdities (a.k.a. new paradigms, the new economy or the tech bubble) hence, perhaps, the popularity of financial news channels such as CNBC.
