Keynesian Beauty Contest

Keynes's analogy

In Chapter 12 of the General Theory, Keynes (1936) described a newspaper competition in which entrants pick the six prettiest faces from a hundred photographs, and the prize goes to whoever comes closest to the average choice. In such a contest each person must predict not their own taste but others' taste, and indeed 'what average opinion expects the average opinion to be,' and Keynes noted that some practice the fourth, fifth and higher degrees. He argued that the stock market takes on a speculative character because professional investors try to anticipate short-term shifts in market psychology rather than long-term returns. The view ties into the treatment of uncertainty in Keynesian economics.

p-beauty contest experiments and level-k thinking

In the guessing game described by Moulin (1986), participants pick a number from 0 to 100 and whoever is closest to two-thirds of the average wins. Carrying iterated elimination to its end, everyone choosing 0 is the unique Nash equilibrium. In Nagel's (1995) experiments, first-round choices clustered near 33 and 22, suggesting that people reason only one or two steps. Stahl and Wilson's (1995) level-k model, experiments by Ho, Camerer and Weigelt (1998), the cognitive hierarchy model of Camerer, Ho and Chong (2004) and work by Costa-Gomes and Crawford (2006) formalized this limited-depth reasoning. Bosch-Domènech et al. (2002) found similar patterns in contests run with thousands of newspaper readers, and Coricelli and Nagel (2009) linked depth of reasoning to activity in the medial prefrontal cortex.

Higher-order expectations in markets and macro

Allen, Morris and Shin (2006) showed that in asset markets where investors forecast one another's expectations, prices can overreact to public information and drift from fundamentals. Morris and Shin (2002) argued that when beauty-contest motives are strong, imprecise public information can actually lower social welfare, sparking a debate over central bank communication. Woodford (2003) showed that imperfect common knowledge makes the effects of monetary policy persist. Shiller (2000) argued that such psychology inflates asset bubbles, which connects to debates over the efficient market hypothesis and information cascades.

FAQ

What is the Keynesian beauty contest in simple terms?

It's a contest you win by picking not the face you think is prettiest but the one other people will pick. Keynes used it to describe how stock investors try to predict what others think rather than what a company is worth.

What number wins the guessing game?

In theory the answer is 0, but since most people only think one or two steps ahead, winning numbers usually land somewhere around 20 to 30. The trick is predicting how deeply everyone else will think.

Sources reviewed: 2026-10-26

References

1. Keynes, J. M. (1936). The General Theory of Employment, Interest and Money. London: Macmillan.
2. Moulin, H. (1986). Game Theory for the Social Sciences (2nd ed.). New York: New York University Press.
3. Nagel, R. (1995). Unraveling in guessing games: An experimental study. American Economic Review, 85(5), 1313–1326.
4. Stahl, D. O., & Wilson, P. W. (1995). On players' models of other players: Theory and experimental evidence. Games and Economic Behavior, 10(1), 218–254.
5. Ho, T.-H., Camerer, C., & Weigelt, K. (1998). Iterated dominance and iterated best response in experimental 'p-beauty contests'. American Economic Review, 88(4), 947–969.
6. Bosch-Domènech, A., Montalvo, J. G., Nagel, R., & Satorra, A. (2002). One, two, (three), infinity, ...: Newspaper and lab beauty-contest experiments. American Economic Review, 92(5), 1687–1701.
7. Camerer, C. F., Ho, T.-H., & Chong, J.-K. (2004). A cognitive hierarchy model of games. Quarterly Journal of Economics, 119(3), 861–898.
8. Costa-Gomes, M. A., & Crawford, V. P. (2006). Cognition and behavior in two-person guessing games: An experimental study. American Economic Review, 96(5), 1737–1768.
9. Morris, S., & Shin, H. S. (2002). Social value of public information. American Economic Review, 92(5), 1521–1534.
10. Allen, F., Morris, S., & Shin, H. S. (2006). Beauty contests and iterated expectations in asset markets. Review of Financial Studies, 19(3), 719–752.
11. Shiller, R. J. (2000). Irrational Exuberance. Princeton, NJ: Princeton University Press.
12. Coricelli, G., & Nagel, R. (2009). Neural correlates of depth of strategic reasoning in medial prefrontal cortex. Proceedings of the National Academy of Sciences, 106(23), 9163–9168.
13. Woodford, M. (2003). Imperfect common knowledge and the effects of monetary policy. In P. Aghion et al. (Eds.), Knowledge, Information, and Expectations in Modern Macroeconomics (pp. 25–58). Princeton, NJ: Princeton University Press.