

Keynesian beauty contest - vecter
http://en.wikipedia.org/wiki/Keynesian_beauty_contest

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contextfree
This is the only way I can make sense of the XML frenzy of the late 90s/early
00s.

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chopsueyar
Did you drop your SOAP?

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olalonde
I like it overall but as any analogy, it must be used with caution as it fails
to infer a fundamental principle of the stock market. In a Keynesian beauty
contest, contestants cannot lose as long as they pick the most popular face.
In the stock market, it is very possible to lose even if you pick the most
popular stock, in the event of a bankruptcy for instance.

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awaz
That explains the recent LinkedIn IPO prices, people trying to guess how much
the 'average' people value LinkedIn rather than how much you value it (or the
value based on certain indicators)

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rvkennedy
A key result of this analysis is that there's an element of feedback. If
you're the only investor in the world who's using this strategy, it may work.
But the larger the proportion of investors who do this, the more locally
unstable the market will become. It's a far cry from the "perfect, self-
correcting market", which we can think of as the zeroth order long-term
behaviour. But feedback effects are not sufficiently local that they cannot
have destructive effects over a multi-year timescale.

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lionhearted
> This would have people pricing shares not based on what they think their
> fundamental value is, but rather on what they think everyone else thinks
> their value is, or what everybody else would predict the average assessment
> of value is.

This is true for people who are buying as speculative investors and focused on
short term movements in stock price.

However, that's not everyone by a longshot. There are plenty of people who buy
for underlying asset value and dividends.

See, for instance -

<http://en.wikipedia.org/wiki/Intelligent_Investor>

Warren Buffet has said that The Intelligent Investor is the best book on
investing ever written.

A fundamental tenet of value investing is that you're buying a small part of a
business, not something separate from the business. Keynes is talking about
buying stocks to speculative on short term price movements, which is risky and
probably a bad strategy for the vast majority of people. But buying a share of
a business that's fundamentally solid and priced attractively is rational,
even if the business isn't currently popular.

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esrauch
It seems to me that for companies that pay no dividends (and assuming you
would have not nearly enough stock to have a vote that matters) there is no
value at all in the stock outside of the stock price. The only relevant metric
is what other people are willing to pay to buy your stock. Through some
mechanism that I can't undertand, the perception of the stock value is still
tied to the performance of the company, so it seems like even people going
long are still dealing with their predictions of other peoples valuations.

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lotharbot
> for companies that pay no dividends ... there is no value at all in the
> stock outside of the stock price [but] the perception of the stock value is
> still tied to the performance of the company

Owning a stock is like owning a fraction of a company. The value of stock
comes from the following:

(1) dividends (that is, a fraction of current profits)

(2) assets (that is, a fraction of stuff the company has that could be sold;
one of Warren Buffett's strategies is to buy companies that have more assets
than their total stock price, such that merely liquidating the company would
turn a profit.)

(3) estimated future dividends (a company may not presently be paying
dividends, but may be on a clear trajectory to profitability and therefore
future dividends)

(4) estimated future assets ("growth" type stocks are in companies that are
investing profits in assets rather than paying out dividends. This has certain
tax advantages over dividend-paying stocks.)

(5) estimated future valuations (that is, guesses as to what others might pay
for the stock later)

Notice that only one of these involves perceptions of others' valuations. The
rest are a matter of company performance.

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_delirium
For assets (or future assets), you need to discount them by a probability that
the investor could ever actually see that money, either via dividends, or via
a 'liquidity event' of one sort or another, since an asset isn't really _your_
asset if you can never touch it. Warren Buffet sees to that by buying
controlling stakes in companies, so not only do the companies have assets that
could theoretically be liquidated for a profit, but he could actually
liquidate the company if he wanted to (or at least, could force it to start
selling off assets and returning their value as dividends).

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misterbee
(Something like) Those are actually real!

My mother taught me that basic strategy for betting on a "horse race" carnival
game with the similar design (but the winner was chosen randomply via multiple
rolls of a die that represented each "step" along a racetrack)

She taught me to watch the bettors and bet on whichever horse had the least
number of shares purchased. If the bets were semi-secret, and we had to engage
people ("analysts"?) in conversation about their supposed bets, it would be
even more like the real equities marker.

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verroq
Where are the people that estimate how much of the population classify into
level 1, 2, 3 ... and pick choice of the people in the level with the most
people.

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misterbee
In Hollywood.

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rafaelc
This applies directly to startups:
[http://blog.rafaelcorrales.com/2010/10/entrepreneurs-
keynesi...](http://blog.rafaelcorrales.com/2010/10/entrepreneurs-keynesian-
beauty-contest.html)

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joejohnson
So, if the strategy can be extended indefinitely, what is the rational
strategy?

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endgame
1\. Post Wikipedia Link

2\. Collect Karma

Is it too much to ask for a semi-descriptive link title?

