Category: economics
Associated thinker(s): John Maynard Keynes
Original publication or approximate period: The General Theory of Employment, Interest and Money, Chapter 12 (1936)
Difficulty: Beginner
Type: model
Themes: expectations; markets; strategic reasoning
Related experiments: prisoners-dilemma; allais-paradox
A newspaper contest displays many photographs and asks entrants to select a set of faces. The prize goes to a selection that best matches the aggregate choices. Choosing what you personally prefer may be a poor strategy. You instead consider what other people will select, while recognizing that they may also be forecasting the group.
Keynes used the image to illuminate financial speculation: an investor may care about the price others will pay soon rather than an asset’s long-run yield. The contest is an analogy for a pressure within markets, not a complete mathematical theory of every asset price.
How does a reward for matching collective expectations change what it is rational for an individual to predict?
The contest introduces higher-order beliefs: beliefs about other people’s beliefs. It helps explain why having a good estimate of long-run value might not be enough for short-term success. It also suggests that institutions can reward conformity even when some participants privately doubt the prevailing assessment.
The speculative-market reading emphasizes self-referential expectations and the difficulty of profiting by correcting the crowd too early. An equilibrium reading asks which common beliefs and information structures can make forecasts mutually consistent. Experimental bounded-reasoning approaches examine how far people actually iterate predictions. A stylized game cannot by itself establish whether a particular market price is a bubble.
Keynes was not recommending judgments of human worth based on appearance; the historical contest supplies a strategic analogy. The familiar “guess two thirds of the average number” game is a later adaptation, not the exact newspaper scenario. Market prices can also depend on dividends, constraints, and information rather than only crowd imitation.
Number-guessing games make recursive reasoning explicit. For numbers in a fixed nonnegative interval and a target below the mean, iterated reasoning can push guesses toward zero; actual play depends on beliefs about others’ reasoning.
The original Chapter 12 text supports the historical analogy, while Thaler’s university article supports the modern number-game comparison. The two forms are cross-explained rather than treated as identical historical experiments.
Verified on 2026-10-30. Source coverage: [1] Original newspaper contest analogy and speculation versus enterprise. [2] Modern number-guessing adaptation and recursive expectations. Reflection questions and illustrative numerical examples are original editorial material.