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Beauty Contested. How much of Keynes’ remains in Behavioural Economics Beauty Contests?

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  • Alessandro Lanteri

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  • Anna Carabelli

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Abstract

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.

Suggested Citation

  • Alessandro Lanteri & Anna Carabelli, 2008. "Beauty Contested. How much of Keynes’ remains in Behavioural Economics Beauty Contests?," ICER Working Papers 20-2008, ICER - International Centre for Economic Research.
  • Handle: RePEc:icr:wpicer:20-2008
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    References listed on IDEAS

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    1. Novarese, Marco & Lanteri, Alessandro, 2007. "Individual learning: theory formation, and feedback in a complex task," MPRA Paper 3049, University Library of Munich, Germany.
    2. Antoni Bosch-Domènech & José G. Montalvo & Rosemarie Nagel & Albert Satorra, 2002. "One, Two, (Three), Infinity, ...: Newspaper and Lab Beauty-Contest Experiments," American Economic Review, American Economic Association, vol. 92(5), pages 1687-1701, December.
    3. Anna Carabelli, 2002. "Speculation and reasonableness: a non-Bayesian theory of rationality," Chapters,in: Post Keynesian Econometrics, Microeconomics and the Theory of the Firm, chapter 10 Edward Elgar Publishing.
    4. Guth, Werner & Kocher, Martin & Sutter, Matthias, 2002. "Experimental 'beauty contests' with homogeneous and heterogeneous players and with interior and boundary equilibria," Economics Letters, Elsevier, vol. 74(2), pages 219-228, January.
    5. Duffy, John & Nagel, Rosemarie, 1997. "On the Robustness of Behaviour in Experimental "Beauty Contest" Games," Economic Journal, Royal Economic Society, vol. 107(445), pages 1684-1700, November.
    6. S. Berninghaus & W. Güth, 2007. "Experimental Economics," Chapters,in: Elgar Companion to Neo-Schumpeterian Economics, chapter 66 Edward Elgar Publishing.
    7. Nagel, Rosemarie, 1995. "Unraveling in Guessing Games: An Experimental Study," American Economic Review, American Economic Association, vol. 85(5), pages 1313-1326, December.
    8. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-1181, September.
    9. Alessandro Lanteri & Marco Novarese, 2008. "The beauty of the contest: A novel approach to experimental beauty contests," Economics Bulletin, AccessEcon, vol. 3(52), pages 1-10.
    10. repec:ebl:ecbull:v:3:y:2008:i:52:p:1-10 is not listed on IDEAS
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    Cited by:

    1. D'Orlando, Fabio & Sanfilippo, Eleonora, 2010. "Behavioral foundations for the Keynesian consumption function," Journal of Economic Psychology, Elsevier, vol. 31(6), pages 1035-1046, December.
    2. Marcuzzo, Maria Cristina, 2012. "Speculation and regulation in commodity markets: The Keynesian approach in theory and practice," MPRA Paper 44131, University Library of Munich, Germany.

    More about this item

    Keywords

    Beauty Contest; Behavioural Economics; Keynes; Reasoning.;

    JEL classification:

    • B31 - Schools of Economic Thought and Methodology - - History of Economic 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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