In one of the most famous passages of economic literature, John Maynard Keynes (1936, p.156) likens the stock market to a beauty contest in which the winners are those who anticipate the average opinion. Recently there have been attempts at investigating the BC experimentally (Nagel 1995, Duffy & Nagel 1997, Ho et al. 1998, Bosch-Domenech et al. 2002, Güth et al. 2002). In Experimental Beauty Contests, participants choose a real number from a closed interval, e.g. I [0,100]. Whoever picks the number closest to p times the average (usuallywith p = 2/3) is the winner of a monetary reward. An experiment like this is dominance solvable: the process of iterated elimination of dominated strategies leads to the unique and stable equilibrium at which every player chooses zero, and every player wins. Keynes’ metaphor, on the other hand, referred to a situation in which not all participants can win, so that the goal of individual investors and speculators must be “to outwit the crowd” (p. 152). Despite the differences, the Keynesian theory of decision under uncertainty tallies with the behaviour observed in Experimental Beauty Contests.
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Paper provided by ICER - International Centre for Economic Research in its series ICER Working Papers with number
20-2008.
Length: 14 pages Date of creation: Jun 2008 Date of revision: Handle: RePEc:icr:wpicer:20-2008
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Find related papers by JEL classification: B31 - Schools of Economic Thought and Methodology - - History of Thought: Individuals - - - Individuals C9 - Mathematical and Quantitative Methods - - Design of Experiments D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
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