We Pick Stocks Like We Pick Cute Animals

In: Culture Stock Market

24 Jan 2011

Building on my criticism in yesterday’s post, half of the people in this NPR experiment were asked to view three animals and pick the cutest; the other half were asked to pick which one they thought everyone else would think is the cutest. The results are below. The authors point out that this isn’t a new analogy, with Keynes having observed in 1936 that the stock market runs like a beauty contest. It’s an interesting example of how individual preferences can differ so much from social choices.

In the market, Keynes argued, it doesn’t make sense to invest in the company you think is best. It makes sense to invest in the company that you think other people will think is best. Because if everyone else invests in a company, the price of its stock will rise.

Of course, when everyone does this, it leads to a slippery investment world. “We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be,” Keynes wrote.

Pietra Rivoli, a professor at Georgetown’s business school, explains the problem with a market like this: “The key danger is that nobody’s really thinking.”

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3 Responses to We Pick Stocks Like We Pick Cute Animals

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Andres

January 24th, 2011 at 11:47 am

Very interesting !

Do you know where I can read in detail about the actual experiment?

I tried the link you provide but could´t find any material there.

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Marie

January 24th, 2011 at 7:05 pm

Interesting! A similar idea I’ve thought about is how to vote in election primaries. If the candidate I like is unpopular, should I vote for them anyway, or vote for one of the more popular ones that I think is best able to defeat the other party?

Found this blog recently, love it…

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Andrew

January 26th, 2011 at 5:56 am

I don’t quite understand this experiment: they ask which is the most likely to be voted cutest, and people have given the correct answer. There doesn’t seem to be any contradiction at all between the two polls.

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