Investors Underground and the Use of Game Theory in Investing

Economists from John Maynard Keynes to Lloyd S. Shapley have applied the principles of game theory to investment strategy as a means of explaining why the value of a particular stock may fluctuate to such a perplexing degree. Keynes explained the role of game theory and stock market investing by creating a metaphorical beauty contest held through a newspaper. Investors Underground, a day trading community in which members freely exchange strategic principles and support each other’s investment efforts through a variety of methods, believes understanding the nature of Keynes’ newspaper contest reveals an important truth about successful investment strategies.

In the contest created by Keynes, readers of the newspaper would be tasked with selecting the six most beautiful faces from among 100 total photographs, with the caveat being that only those who are able to pick the most popular choices would be declared a winner. Investors Underground explained that Keynes used this metaphorical example to demonstrate that the majority of investors are not concerned with choosing a stock they personally believe to be the best, nor are they concerned with choosing a stock the majority of people believe to be best. Instead, investors are often choosing a stock based on a convoluted third degree principle, or what they believe the majority of people will believe to be the majority opinion.

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