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> An investor would not really care about the stock, but only about the behavior of other investors. This sounds like the idea of a Keynesian Beauty Contest (h

> An investor would not really care about the stock, but only about the behavior of other investors. This sounds like the idea of a Keynesian Beauty Contest (https://en.wikipedia.org/wiki/Keynesian_beauty_contest https://en.wikipedia.org/wiki/Keynesian_beauty_contest) "It is not a case of choosing those [faces] that, to the best of one's judgment, are really the prettiest, nor even those that 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 practice the fourth, fifth and higher degrees."

agumonkey 6y ago
And I believe they orbit around the set of self fulfilling prophecies described in books. Fibonacci or similar simple arithmetic range estimates, deviation from the mean, etc.
- TeMPOraL 6y ago
  Isn't this the reverse of a self-fulfilling prophecy? A self-fulfilling prophecy attracts reality to the state it describes. The stock market, being anti-inductive, attracts reality away from whatever predictions being made - that is, for example, if I found a pattern that proves $GME reaches the Moon on Tuesday, enough other people would find that pattern too and start buying early, and $GME would reach the Moon on Monday, and probably crash on Tuesday.
  - AbrahamParangi 6y ago
    That’s an artifact of including a specific time in your prediction. If you made that same statement time-invariant “GME will moon” it becomes a self-fulfilling prophecy.
    - Udik 6y ago
      It's true, but making the statement time-invariant is also an oversimplification. Time does not end with the fulfillment of the prophecy and everybody knows that. Where does $GME go after reaching the moon? It can only stay there or go down, and in both cases people would start selling it.
  - agumonkey 6y ago
    I think it does both but oscillates. At first people think it's an edge so it emerges as truth, then agents realize it's know and tweak around it.. but it's still the basis of their action. All in all, I had the idea that pure chaos cannot be used so there will always have weak superstitious held as reference points for a game to emerge. The one who can play it right (or have enough resources to endure errors) or not when it shouldn't will benefit from the others.
  - Double_Cast 6y ago
    Bubbles are inductive. Arbitrage is anti-inductive.
deleted 6y ago
[deleted]
ramblerman 6y ago
Interesting, given he is such a prominent Economist I'm a little surprised by the simplicity of the analogy though. It seems strange that he has reduced it to one where there is no objective value at all. As an equity at the first level is still about how the company will perform in the future, no? And thus has an objective value.
- tt433 6y ago
  Everything is worth what it's purchaser will pay for it; every transaction is subjective
  - deleted 6y ago
    [deleted]
- machiaweliczny 6y ago
  Beauty has objective value as defined as such but I leave it to you to figure out.
  - hirundo 6y ago
    Everything subjective is objective. I leave it to you to figure out how.
- brownbat 6y ago
  This is a really important puzzle. In other terms, basically the efficient markets hypothesis vs, well, a week of GameStop prices. At certain extremes, a stock price is clearly objective. If the company is bankrupt and wiping all stock, that's objective. If the company does so well the shareholders demand an immense dividend or buyback, that's objective. Those are the fixed points where stock price is set to money in hand. Are the swings in the market just irrational participants between those extremes? We could imagine purely objective superintelligent AI dominating a market, investing only to those "true" values. Such AIs might determine p(bankruptcy) and p(payout), knowing those are the "true" outcomes of the prop bet, and set expected price as the ratio of those two probabilities. But both those p()s are vanishingly small for most companies, and infinite precision will be impossible. Even if you were nearly omniscient about all current factors within a company, the slightest possible change in either probability could swing the ratio in dramatic ways. (Add on to that the graveyard of companies that performed well, got fat, and failed to adapt... current performance is somewhat but not fully predictive of longevity.) So basically, what if EMH is true, but stock pricing is a debate at an arbitrary level of precision, to make it close to meaningless in short time windows? I'm not an expert so I'm sure professionals or academics would roll their eyes and offer something even more explanatory, but that's my best hunch at resolving this tension so far. (The upshot of this theory is that it seems to validate strategies that help you zoom way out: low fees, broad diversified indexes, long time windows... those are the real value trades.)
nikanj 6y ago
And thus, bitcoin. A stock that's guaranteed to provide no dividends, do no buy-backs, or deliver any value - aside from the ability to sell it to the next fool for an even greater value.
- BelenusMordred 6y ago
  You forgot no share dilution in this offtopic tangent. Every stock out there can double their issuance if they want to.
  - vermilingua 6y ago
    As can bitcoin, and it would only take a soft fork.
    - WrtCdEvrydy 6y ago
      Yeah, but you have to have people switch to that chain. Miners won't because it would devalue their coin. New buyers might because they can "buy cheap"
    - optimiz3 6y ago
      It wouldn't be Bitcoin then; a change in rules creates a new coin. There would have to be incredibly strong incentives for people to accept a fork that would debase their assets. Nit: it would also require a hard, not a soft fork.
    - BelenusMordred 6y ago
      There's a soft fork coming up for taproot requiring a super-consensus of 90% miners. It will likely go through and still be bitcoin afterwards. Thinking you might not understand the difference between the various types of forks the protocol can undergo. https://taprootactivation.com/ https://taprootactivation.com/
    - ric2b 6y ago
      > and it would only take a soft fork. No, it would be a hard-fork and be rejected by all nodes that weren't explicitly updated to accept it.
kqr 6y ago
Exemplified in a competition in -- I think -- The New York Times: readers were instructed to guess a number between 1 and 100, and were told the winning guess would be the one closest to 2/3 of the average guess.
- ak39 6y ago
  What was the result?
  - kqr 6y ago
    If I remember correctly, somewhere in the range 17--23. The way one should have thought of it, with hindsight, is that there are going to be several groups of people: - those who don't understand the problem and just guess a number between 1 and 100, - those who only reason to one degree, and guess 33, - those who only reason to two degrees (ah but if everyone else guesses 33 I should aim for two thirds of that!) - those who reason to initiate degree and guess 0 The real competition is guessing the proportions of these groups.
    - jameshart 6y ago
      The way you originally stated the problem was to pick a number between 1 and 100, so 0 wouldn't even be an option, and 1 is probably the pareto optimal strategy (proof left as an exercise for the reader, etc.). But then you probably still have to account in your strategy for estimating the proportion of people who will reason to infinite degree and estimate 1, as well as the proportion who will reason to an infinite degree and misread the rules, and guess 0...
- jameshart 6y ago
  No mention of a NYT version of the game ever happening on the wikipedia article - https://en.wikipedia.org/wiki/Guess_2/3_of_the_average https://en.wikipedia.org/wiki/Guess_2/3_of_the_average - but that wiki page is a good write up of the basic idea and its relationship to the Keynesian Beauty Contest
rtheunissen 6y ago
This is also how I've experienced primary elections in the US: people voting for who they think other people will vote for.
- MereInterest 6y ago
  Very true, and this is in large part a function of the voting system in the US. Suppose you are choosing between primary candidates A and B, who will run against C. You'd prefer A over B, but B has wider appeal in the general election. A better system would be a voting system that doesn't split the vote, because then you could forgo the primaries altogether. Have A, B, and C all run against each other directly. This is impossible with today's first past the post system, because that would immediately hand the election to C.
- tshaddox 6y ago
  General elections too.

agumonkey 6y ago

And I believe they orbit around the set of self fulfilling prophecies described in books. Fibonacci or similar simple arithmetic range estimates, deviation from the mean, etc.

TeMPOraL 6y ago
Isn't this the reverse of a self-fulfilling prophecy? A self-fulfilling prophecy attracts reality to the state it describes. The stock market, being anti-inductive, attracts reality away from whatever predictions being made - that is, for example, if I found a pattern that proves $GME reaches the Moon on Tuesday, enough other people would find that pattern too and start buying early, and $GME would reach the Moon on Monday, and probably crash on Tuesday.
- AbrahamParangi 6y ago
  That’s an artifact of including a specific time in your prediction. If you made that same statement time-invariant “GME will moon” it becomes a self-fulfilling prophecy.
  - Udik 6y ago
    It's true, but making the statement time-invariant is also an oversimplification. Time does not end with the fulfillment of the prophecy and everybody knows that. Where does $GME go after reaching the moon? It can only stay there or go down, and in both cases people would start selling it.
- agumonkey 6y ago
  I think it does both but oscillates. At first people think it's an edge so it emerges as truth, then agents realize it's know and tweak around it.. but it's still the basis of their action. All in all, I had the idea that pure chaos cannot be used so there will always have weak superstitious held as reference points for a game to emerge. The one who can play it right (or have enough resources to endure errors) or not when it shouldn't will benefit from the others.
- Double_Cast 6y ago
  Bubbles are inductive. Arbitrage is anti-inductive.

deleted 6y ago

[deleted]

ramblerman 6y ago

Interesting, given he is such a prominent Economist I'm a little surprised by the simplicity of the analogy though. It seems strange that he has reduced it to one where there is no objective value at all. As an equity at the first level is still about how the company will perform in the future, no? And thus has an objective value.

tt433 6y ago
Everything is worth what it's purchaser will pay for it; every transaction is subjective
- deleted 6y ago
  [deleted]
machiaweliczny 6y ago
Beauty has objective value as defined as such but I leave it to you to figure out.
- hirundo 6y ago
  Everything subjective is objective. I leave it to you to figure out how.
brownbat 6y ago
This is a really important puzzle. In other terms, basically the efficient markets hypothesis vs, well, a week of GameStop prices. At certain extremes, a stock price is clearly objective. If the company is bankrupt and wiping all stock, that's objective. If the company does so well the shareholders demand an immense dividend or buyback, that's objective. Those are the fixed points where stock price is set to money in hand. Are the swings in the market just irrational participants between those extremes? We could imagine purely objective superintelligent AI dominating a market, investing only to those "true" values. Such AIs might determine p(bankruptcy) and p(payout), knowing those are the "true" outcomes of the prop bet, and set expected price as the ratio of those two probabilities. But both those p()s are vanishingly small for most companies, and infinite precision will be impossible. Even if you were nearly omniscient about all current factors within a company, the slightest possible change in either probability could swing the ratio in dramatic ways. (Add on to that the graveyard of companies that performed well, got fat, and failed to adapt... current performance is somewhat but not fully predictive of longevity.) So basically, what if EMH is true, but stock pricing is a debate at an arbitrary level of precision, to make it close to meaningless in short time windows? I'm not an expert so I'm sure professionals or academics would roll their eyes and offer something even more explanatory, but that's my best hunch at resolving this tension so far. (The upshot of this theory is that it seems to validate strategies that help you zoom way out: low fees, broad diversified indexes, long time windows... those are the real value trades.)

nikanj 6y ago

And thus, bitcoin. A stock that's guaranteed to provide no dividends, do no buy-backs, or deliver any value - aside from the ability to sell it to the next fool for an even greater value.

BelenusMordred 6y ago
You forgot no share dilution in this offtopic tangent. Every stock out there can double their issuance if they want to.
- vermilingua 6y ago
  As can bitcoin, and it would only take a soft fork.
  - WrtCdEvrydy 6y ago
    Yeah, but you have to have people switch to that chain. Miners won't because it would devalue their coin. New buyers might because they can "buy cheap"
  - optimiz3 6y ago
    It wouldn't be Bitcoin then; a change in rules creates a new coin. There would have to be incredibly strong incentives for people to accept a fork that would debase their assets. Nit: it would also require a hard, not a soft fork.
  - BelenusMordred 6y ago
    There's a soft fork coming up for taproot requiring a super-consensus of 90% miners. It will likely go through and still be bitcoin afterwards. Thinking you might not understand the difference between the various types of forks the protocol can undergo. https://taprootactivation.com/ https://taprootactivation.com/
  - ric2b 6y ago
    > and it would only take a soft fork. No, it would be a hard-fork and be rejected by all nodes that weren't explicitly updated to accept it.

kqr 6y ago

Exemplified in a competition in -- I think -- The New York Times: readers were instructed to guess a number between 1 and 100, and were told the winning guess would be the one closest to 2/3 of the average guess.

ak39 6y ago
What was the result?
- kqr 6y ago
  If I remember correctly, somewhere in the range 17--23. The way one should have thought of it, with hindsight, is that there are going to be several groups of people: - those who don't understand the problem and just guess a number between 1 and 100, - those who only reason to one degree, and guess 33, - those who only reason to two degrees (ah but if everyone else guesses 33 I should aim for two thirds of that!) - those who reason to initiate degree and guess 0 The real competition is guessing the proportions of these groups.
  - jameshart 6y ago
    The way you originally stated the problem was to pick a number between 1 and 100, so 0 wouldn't even be an option, and 1 is probably the pareto optimal strategy (proof left as an exercise for the reader, etc.). But then you probably still have to account in your strategy for estimating the proportion of people who will reason to infinite degree and estimate 1, as well as the proportion who will reason to an infinite degree and misread the rules, and guess 0...
jameshart 6y ago
No mention of a NYT version of the game ever happening on the wikipedia article - https://en.wikipedia.org/wiki/Guess_2/3_of_the_average https://en.wikipedia.org/wiki/Guess_2/3_of_the_average - but that wiki page is a good write up of the basic idea and its relationship to the Keynesian Beauty Contest

rtheunissen 6y ago

This is also how I've experienced primary elections in the US: people voting for who they think other people will vote for.

MereInterest 6y ago
Very true, and this is in large part a function of the voting system in the US. Suppose you are choosing between primary candidates A and B, who will run against C. You'd prefer A over B, but B has wider appeal in the general election. A better system would be a voting system that doesn't split the vote, because then you could forgo the primaries altogether. Have A, B, and C all run against each other directly. This is impossible with today's first past the post system, because that would immediately hand the election to C.
tshaddox 6y ago
General elections too.