If Keynes's thinking mode of beauty pageant is applied to the stock market, then speculation is based on public psychology. For example, you don't know the true value of a stock, but why do you spend one share of 20 yuan to buy it? Because you expect someone to buy from you at a higher price. Malkiel summed up Keynes's view as the biggest fool theory: You are willing to pay a high price for something, even if it is worthless, because you expect a bigger fool to buy it from you at a higher price. The key to speculation is to judge that there is a bigger fool than yourself. As long as you are not the biggest fool, it is a question of winning more and winning less. If you can't find a bigger fool who is willing to buy from you at a higher price, then you are the biggest fool.
[Editor] The basis of Keynes's beauty pageant theory
In financial market investment, Keynes's beauty pageant theory is actually used to analyze the influence of people's psychological activities on investment decisions. However, at present, most fundamental analysts and economists refuse to consider the psychological factors of market participants, while technical analysts often stick to the formula that "market transactions are rational" and do not analyze the psychological factors of traders in detail, which may be the main reason why the founders of fundamental analysts and technical analysts themselves have not made a lot of money from the financial market.
From the actual situation, the behavioral motives of financial market participants are different. Their minds, motives, ways of thinking, risk preferences and trading horizons may be completely different. Although it is generally believed that people are rational when they trade voluntarily, in fact, people can only be rational under limited circumstances. On the basis of the nonlinear utility theory developed by Daniel Kahneman and others, some financial economists began to introduce some psychological viewpoints about human behavior to explain the abnormal phenomena of financial product trading, such as herd mentality, noise trading, bubbles and so on. These theories form the behavioral school in modern financial theory, which is called behavioral finance.
Behavioral finance theory tries to describe the real but often intuitive behaviors of decision makers, whether they seem reasonable or unreasonable, and make predictions before, during and after decision-making. This is closely related to behavior evaluation, especially the behavior evaluation of capital market participants. Because decision-making behavior is predictable, it is of economic value to others.
Just as guessing a beauty pageant champion should consider not only normal factors such as the appearance of the contestants and the preferences of the audience, but also abnormal situations such as bribery and scandals, behavioral finance theory not only studies the absorption, screening and processing of information and its consequences, but also studies the abnormal behavior of people, so as to observe the influence of irrational behavior on other market participants. Through the study of various behaviors of market traders, behavioral finance questioned three hypotheses of efficient market theory. For the hypothesis that investors are rational in efficient market theory, behavioral finance puts forward that investors' normal behavior should replace rational behavior hypothesis, and normality does not mean rationality; For the irrational behavior of investors, behavioral finance believes that the decisions of irrational investors are not always random, and often develop in the same direction; Efficient market theory holds that arbitrage can restore market efficiency, and price deviation is a short-lived phenomenon. Behavioral finance thinks that arbitrage is not only conditional, but also risky and can't play the expected role.
Although behavioral finance has achieved many fruitful results and some new research conclusions and ideas have been widely used, as a new research field, behavioral finance needs to be continuously enriched and improved. But one thing is certain: if technical analysis is based on psychological analysis, that is, the conclusion of behavioral finance theory, combined with the advantages of fundamental analysis, financial investment theory will be more practical.