IMC Colloquium Series: "Are Stock Markets Beauty Contests?"

Friday, March 18, 2011
11:30 - 12:30

Dr. Kenneth Kasa
Department of Economics, Simon Fraser University


In 1936, Keynes drew an analogy between investing in the stock market and predicting the winner of a beauty contest, where the winner is the contestant who is most often selected by others. Since everyone knows that everyone else is trying to predict average opinion, an infinite regress ensues. Keynes argued that markets are bound to be volatile when average opinion itself becomes the object of speculation.

Formalizing Keynes' metaphor has been difficult, as it leads to infinite dimensional fixed point problems. This talk will discuss how frequency domain methods can be used to solve these problems. Evidence is presented that higher-order belief dynamics play a significant role in observed asset markets.