Animal spirits, beauty contests and expected returns

Jukka Ilomäki

Journal of Economics and Finance, 2017, vol. 41, issue 3, No 4, 474-486

Abstract: Abstract Keynes argues that the beauty contest in financial markets is the combination of market psychology and rational higher-order beliefs. We connect both of them in the rational choice framework. In the analysis, we examine the expected returns of short-lived risk averse investors. According to the results, the animal spirits component reduces expected returns for rational informed and uninformed investors when the Keynesian beauty contest is present. This implies that rational investors ignore animal spirits in financial markets.

Keywords: Investor rationality; Stock market; Animal spirits; Investment decisions (search for similar items in EconPapers)
JEL-codes: G02 G11 G12 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s12197-016-9364-8

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