Saturday, January 22, 2011

That economics experiment with cute animals, it was about the stockmarket

The experiment is here.

Vote again if you want to.

Then look below the fold to find out what it was really doing.

From NPR’s Planet Money:

On the surface, Planet Money’s first-ever economics experiment was all about cute animals. But we were really trying to get a better sense of how the stock market works.

We got the idea from John Maynard Keynes. Back in 1936, he described the stock market as a particular kind of beauty contest. You see a bunch of women's faces, but you're not supposed to say who you think is prettiest. You're supposed to guess who everyone else will think is the prettiest.

In the market, Keynes argued, it doesn't make sense to invest in the company you think is best. It makes sense to invest in the company that you think other people will think is best. Because if everyone else invests in a company, the price of its stock will rise.

Of course, when everyone does this, it leads to a slippery investment world. "We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be," Keynes wrote.

Instead of photos of people, we used videos of cute animals. About 12,000 people participated. When they came to our experiment page, they saw three videos that showed a kitten, a slow loris and a baby polar bear.

Half the people in the experiment were asked to pick the animal they genuinely thought was the cutest. And half were asked to pick the animal they thought everyone else would find the cutest.

Marla Wood, a Planet Money listener from Colorado thought the loris was cutest. But she picked the cat, because she thought that's what everybody else would pick.

If the stock market were filled with Marlas, you could have a huge kitten bubble, even if no one thought kittens were cute.

HT: Econgirl

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