Keynesian Beauty Contest



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I was at a party over the holidays and made a bet with an acquaintance who works in the investment industry. It started when I asked him, “What are your top picks for 2017”? He proceeded to list the stocks that he believed would outperform the market. But then I stopped him half-way at “Visa”. I said, “I’ll bet you that MasterCard will outperform Visa in 2017”. Just friendly competition. After all, we were at a party (drinks were flowing). He replied, “$100 bucks it won’t!”. So, at the end of 2017, we’ll both pull up charts of MasterCard and Visa and see who wins the $100 bet. You see, I chose MasterCard based on my past research into both companies; their financials/key metrics, current valuations, and projections. In 2016, MasterCard (+6%) beat Visa (+0.6%), but both stocks under-performed the S&P 500 (+9.5%). Year-to-date in 2017, MasterCard and Visa are neck-and-neck.

However, the morning after the party, I thought about the quote from John Maynard Keynes, explaining the concept of the “Keynesian Beauty Contest”, that I included at the beginning of my book, Market Masters:

“It is not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences 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.” (Keynes, General Theory of Employment, Interest and Money, 1936).

So, in other words, I was contemplating whether I should have instead placed my bet on the stock (Visa or MasterCard) based on what others think that others think are ‘prettiest’ (i.e., most likely to outperform) – “Third Degree Thinking”.

Robert J. Shiller wrote an article in the New York Times (2011), further exploring the Keynesian Beauty Contest concept:

“The best strategy, Keynes noted, isn’t to pick the faces that are your personal favorites. It is to select those that you think others will think prettiest. Better yet, he said, move to the “third degree” and pick the faces you think that others think that still others think are prettiest. Similarly in speculative markets, he said, you win not by picking the soundest investment, but by picking the investment that others, who are playing the same game, will soon bid up higher.”

Shiller continues by arguing:

“When you hear a conversation among professional investors — including those who manage money for big institutions like university endowments and pension funds — it often sounds as if they are engaged in just this kind of guesswork. You wonder how many people are actually basing their decisions on what is taught in business school: calculating an optimal portfolio based on a rational statistical analysis of fundamental economic data.”

What do you think about the Keynesian Beauty Contest?


Robin Speziale is the national bestselling author of Market Masters, which is available at Chapters, Indigo, and Coles as well as Costco and He lives in Toronto, Ontario. Learn more about Market Masters.


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