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Who's a Pretty Boy Then? Or Beauty Contests, Rationality and Greater Fools

16 Pages Posted: 8 Apr 2004  

James Montier

Dresdner Kleinwort Wasserstein - Global Equity Strategy

Abstract

We have played a classic Keynes' beauty contest with over 1000 professional investors. We find that on average professional investors are using between one and two steps of strategic thinking in forming their expectations. We also find that many investors suffer the curse of knowledge and end up either picking zero or severely underestimating the irrationality of other players. These results speak directly to the ability of investors to exit the market before the mass exodus. We find, unsurprisingly, that only a very small minority show the required level of strategic thinking to beat the gun.

Keywords: Beauty contests, backwards induction, behavioural game theory, experimental economics

JEL Classification: C93, G10

Suggested Citation

Montier, James, Who's a Pretty Boy Then? Or Beauty Contests, Rationality and Greater Fools. Available at SSRN: https://ssrn.com/abstract=505902 or http://dx.doi.org/10.2139/ssrn.505902

James Montier (Contact Author)

Dresdner Kleinwort Wasserstein - Global Equity Strategy ( email )

20 Fenchurch Street
London EC3P 3DB
United Kingdom
02074756821 (Phone)

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