Keynes' Lovely Ladies

Possibly the most famous and influential economist of all time (for better or worse) and almost certainly the greatest intellect of the post war era we will be talking a lot of John Maynard Keynes in this blog but we'd like to start on a light note. In Nicholas Whapshot's illuminating dual biography "Keynes Hayek: The clash that defined modern economics" he recounts Keynes (by all means a fantastic investor who made a fortune, lost it in the crash of 1929 and then rebuilt it up again) being asked what he thought of the process of going about picking "the best" stocks.

He claimed it was the equivalent of a competition run in the local Cambridge newspaper which showed the faces of 5 young women and asked readers to choose not the one that they thought was the "loveliest", but the one that they thought the majority of other readers would find the loveliest.

What he meant by this was that trading does not rely on buying shares in companies that you think will do well, but in buying shares in companies that you think most other people think are going to do well. It takes a certain kind of mind to think from this perspective, and Keynes certainly had it.

PLAY ALONG AT HOME

Next time you're in a large group of people (you can do it with a small group too but the more the merrier) have everyone put a euro (or a dollar or a pound etc) in the pot and get everyone to write down on a piece of paper a number between 1 and 100 telling them the winner will be the person who guesses the closest to 2/3's of the average number. (for the numerically unsure, add up all the numbers, divide that by the amount of players, then divide that number by 3, then multiply by 2. the number closest to this is your winner!)

Credit to Benjamin Polak of Yale University for introducing me to that game. He does it with his Game Theory class to illustrate the same point. What you think about what others think matters. We are not rational individual actors, we are at best rational interlinked actors, and probably irrational interlinked actors.