Keynes' Beauty Contest

One of the professors teaching us this semester is Prof. Amitava Bose. Prof. Bose teaches us macroeconomics, a subject which I still have to learn and appreciate as much as microeconomics. In any case, there was a general demand from the class that he cover certain issues relating to the present financial crisis. Now, this demand was a very practical one from the part of the students, focused towards understanding what exactly happened given that this question was likely to feature in the Summer placement interviews (naturally).

In any case, Prof. Bose obliged – but what he delivered was not a simple, bland explanation of the forces at work partly because he believed that he had not studied the issue at hand and partly because he had called another economist who gave us the “it all began when …” kind-of story. What Prof. Bose did end up doing, was delivering a lecture introducing us to behavioural aspects of the financial markets (something which a lot of people are trying to do) although in a very indirect and subtle way.

Here are some of the points that he made, which I thought I should share.

1. He discussed the notion of every financial asset being a “claim”, and that the whole system was based on a set of “beliefs”. Hence understanding the nature of these beliefs was important to understanding markets. While real assets always remained real assets, financial assets vanish once these “beliefs” are lost.

2. He discussed Ponzi Schemes through an interesting Shibram Charaborty story.

3.He discussed a different version of the so-called Cinderella Effect, one where everyone riding a bubble always believes that there will still be someone else after him who would buy from him what he bought from the previous guy (and not the one about stepchildren being maltreated). He discussed how these beliefs could be self-fulfilling prophecies, i.e. “If everyone believes that a stock price will rise, it will”.

4. The Keynesian Beauty Contest : I was not aware of this famous text in economic literature. I found the very idea of the contest amusing, and the fact that it models the stock market so well even more remarkable. This is the Keynes’ quote from the 12th Chapter of the famous General Theory of Unemployment, Interest and Money

“It is not a case of choosing those [faces] 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.”

5. Then Prof Bose invoked this para from Sherlock Holmes to discuss the notion of Common Knowledge

“Moriarty: All I have to say has already crossed your mind.
Holmes: Then possibly my answer has crossed yours.”

He left us with a bunch of questions like “Is Cash wealth?”, “Can rational agents agree to disagree?”. In particular there was this story of what happens when a man drops his wallet full of cash in the Ganges? Is India poorer? India should be poorer because after all India’s wealth is the sum of each Indian’s wealth. But all the real assets that money can buy still exist and hence India should not be any poorer. Someone else would buy the resources that the farmer could have.

I hope this was interesting to those who like me would like to follow economic though in a casual, “undercover economist” kind of way. I’ll try and get permission to upload the ppt for this lecture soon.

Cheer,

November 19th, 2008 / 411 Comments / Tags: amitava bose, macroeconomics, economics, sherlock, keynes, beauty contest / Trackback

Post Placement Update

Placement week has passed IIM Calcutta, and the campus has felt the impact of the global slowdown in a very real way. Contrasted with the better than usual summer placement figures for last year, this year was surely a let down. Apart from that, everyone got to undergo the high-pressure we’ll-find-a-job-for-each-one-of-you-in-5-days placement process. So I would not be wrong if I described the mood on campus as “solemn”. There are many reasons for this, something which I shall explore in the next post.

Elections are fast approaching (faster than I would like), and I for one am amazed at how big a deal it is. Potential candidates, their possible posts, their chances of winning are the stuff of corridor discussions. The mood is mostly very cynical, particularly given the fact that most people have not landed the kind of summer interns they would have hoped for.

Anyhoo, the eternal optimist in me tries to focus on the classes and the acads – something which is secondary, even tertiary here on campus. That is the saddest part really – a kind of disconnect between the admin, the faculty and the students. It’s rare for me to sound so gloomy but these are things that need to addressed. And sweeping problems under the carpet and pretending they don’t exist is a habit we seem to have become fond of.

In conclusion, what was probably the last paper-based CAT took place last Sunday. I’m glad that the weight assigned to the English section was substantially higher. And to top it all, friends from college who were taking it seem to have done quite well. Here’s wishing them good luck. FSM grant them the they have the power to make the right choices.

Cheers,

PS: I’m not prepared to tell where I will be interning this summer. You can of course ask me personally and I’ll be more than happy to share.

November 19th, 2008 / 408 Comments / Trackback