Keynesian Beauty Contest
Welcome to The Beauty Contest of Minds, where your goal isn’t to choose the “best” number—but to guess what everyone else thinks is the best number. In this mental chess match, all players pick a number between 0 and 100, and the winner is the one closest to two-thirds of the average of everyone’s guesses. Success doesn’t come from being clever alone—it comes from thinking one step ahead… of everyone else thinking one step ahead.
Conceptual Discussion: Keynesian Beauty Contest
Concept:
The Keynesian Beauty Contest models situations where individuals must make decisions based not on intrinsic value, but on what they believe others believe is valuable. Inspired by economist John Maynard Keynes’ analogy to a newspaper beauty contest, it captures the recursive logic of expectation-based reasoning.
How It Works:
Each player independently chooses a number between 0 and 100.
The winner is the player whose number is closest to ⅔ of the average of all chosen numbers.
Example:
If the average guess is 60, the target is 40.
If most people anticipate this and choose around 40, the new target drops to ~26.
The game becomes a recursive spiral: “What do others think others will choose?”
Strategic Insight:
Naïve guessers may pick a random number or 50.
First-level thinkers assume others will pick 50 and guess ⅔ of that (≈33).
Second-level thinkers assume others are guessing 33, and pick ⅔ of that (≈22).
Iterating this process leads rational players toward zero, the Nash equilibrium.
But in real-world play, people stop short of infinite reasoning—creating interesting behavioral dynamics.
Real-World Applications:
Stock markets: Investors buy not what they think is valuable, but what they think others will think is valuable.
Speculative bubbles: Driven by perceived trends, not intrinsic value.
Polling and public opinion: Respondents may tailor answers based on perceived social norms or majority beliefs.
Why It’s Powerful:
The beauty contest game shows that value is often socially constructed. It teaches how markets and groups behave under uncertainty, not just about facts—but about beliefs about beliefs. It’s a vivid lesson in psychology, rationality, and recursive logic.
