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Animal spirits, beauty contests and expected returns

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  • Jukka Ilomäki

    (University of Tampere)

Abstract

Keynes argues that the beauty contest in financial markets is the combination of market psychology and rational higher-order beliefs. We connect both of them in the rational choice framework. In the analysis, we examine the expected returns of short-lived risk averse investors. According to the results, the animal spirits component reduces expected returns for rational informed and uninformed investors when the Keynesian beauty contest is present. This implies that rational investors ignore animal spirits in financial markets.

Suggested Citation

  • Jukka Ilomäki, 2017. "Animal spirits, beauty contests and expected returns," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 41(3), pages 474-486, July.
    • Handle: RePEc:spr:jecfin:v:41:y:2017:i:3:d:10.1007_s12197-016-9364-8
    DOI: 10.1007/s12197-016-9364-8
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    References listed on IDEAS

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    Cited by:

    1. Andrey A. Gnidchenko & Vladimir A. Salnikov, 2015. "Net Comparative Advantage Index: Overcoming the Drawbacks of the Existing Indices," HSE Working papers WP BRP 119/EC/2015, National Research University Higher School of Economics.

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    More about this item

    Keywords

    Investor rationality; Stock market; Animal spirits; Investment decisions;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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