James Montier: Keynes & Risk In Momentum Oriented Markets

Here is a paper linking Keynes thoughts on the stock market with current behavioral finance. To do this, James Montier, uses the concept of the “beauty pagent contest” to outline the number of steps strategic thinkers use in making decisions. Click Here To Skip The Introduction & Read James Montier’s Report On Keynes & Momentum Risk

Article Introduction (Via DRKW)

We have played a “Keynes’ beauty contest” with our clients. The results show that most investors are gaming the market, using an average two steps of strategic thinking. The game demonstrates the difficulty of “beating the gun”, and highlights the extreme risk that investors run in momentum orientated markets.

Article Excerpts (Via DRKW)

“Keynes likened professional investment to a newspaper beauty contest in which the aim was to pick the face that the average respondent would deem to be the prettiest. We have played a version of this game with
our clients. The game was to pick a number between 0-100, the winner would be the player who picked the number closest to 2/3rds of the average number chosen.”

“Hence, in order to escape the market before the mass exodus, you would need to be using three step thinking. In our sample that represents very few players. Perhaps this lends some support to our oftvoiced scepticism over the ability of the majority to “beat the gun”.

Click Here To Read James Montier’s Report On Keynes & Momentum Risk