John Maynard Keynes very famously proposed that the actions of rational agents in a market were akin to a fictional newspaper contest, where entrants were asked to pick who, out of a set of six women, was most beautiful. Those who successfully picked the most popular face would be eligible to win a prize. Keynes asserted that a naive strategy in such a game would be for an entrant to pick based on their own personal opinion of beauty; and that a much more sophisticated strategy would be to make a selection based on the broader public perception of what beauty is. The underlying insight behind the Keynesian beauty contest when applied to the capital markets: that people value a stock not based on what they truly think believe the value is, but rather, on an assessment of what they think everyone else thinks its value is.
High Frequency Trading and Finance’s Race to Irrelevance
The more abstract finance becomes, the less it matters.
June 05, 2014
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Strengthen your fluency in financial statements.