John Maynard Keynes once wrote what may be one of the most insightful observations on financial markets ever conceived:
We have reached the third degree where we devote our intelligence to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth, and higher degrees.
Now, what exactly is he talking about?
While it sounds like Keynes may have been practicing some rare form of martial arts, or Zen meditation, he was actually talking about financial markets … in particular, how to predict them.
Most subscribers are probably familiar with the old ‘Newspaper Beauty Contest’ story. If not, you can click here for a longer description, but here’s the gist:
A newspaper would run photographs of beautiful women and ask readers to mail in a ballot with their choice of which girl was the prettiest. Those who picked the girl that received the most votes would be entered into a drawing for a prize.
The decision-making hierarchy for submitting an entry to this contest goes like this:
– First-degree reasoning: ‘I think this girl is the prettiest, so I’ll pick her.
– Second-degree reasoning: ‘I think that most people will find this girl the prettiest, so I’ll pick her.’
This post was published at FinancialSense on 07/25/2017.
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