The proper degree of delusion: Keynes on financial markets

One good thing about the global recession is that it has reintroduced the world to the genius of John Maynard Keynes, both as an economist and as a writer. Most of us have heard some of his more memorable one-liners (“In the long run, we’re all dead”; “The market can stay irrational for longer than you can stay solvent”) but how about this for a description of financial markets (which Keynes also famously likened to a “casino”):

(P)rofessional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to a competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees.

Take that, efficient market theorists!

By the way, I was reminded of the quotation on reading Paul Krugman’s “How did economists get it so wrong?” in the New York Times, an excellent primer on the development of economic thought since the Depression (but note the initial misquotation of Keynes!).


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