Animal Spirits and Beauty Contests

This is a short extract from my book Financial Speculation. Its a quick look at two key components to successful investing as espoused by John Maynard Keynes. To me it is timeless advice that I try to adhere to.

Animal Spirits and Beauty Contests
Perhaps as a final observation on Keynes activities we should consider the fact that he never published any work on his secret investment techniques etc., though his views and attitudes are well documented. In particular Keynes wrote interestingly about speculation and what he called ‘Animal Spirits’. He noted that most market players are driven by optimism rather than mathematical expectation, and he was an early observer of one of the most corrosive of market practices – excessive activity or overtrading. He correctly realised that when under stress people often adopt active roles for the sake of it. Such is usually a substitute or a displacement activity, or as a way of trying to shake off the stress. Many people feel stress when involved in financial markets and they often alleviate this with quite manic trading activity. Bizarrely they trade even more ferociously when in fact they should calm down and draw back. Though in fact this only one side of the ‘behavioural’ coin in market psychology, the other big problem is curiously the exact opposite, freezing and being unable to act to stop losses from running out of control. Trading like so many things requires a happy medium of activity – few of us seem to be able to do this on a consistent basis.

Keynes also saw the problem of market speculation and prediction as akin to trying to guess who would win a beauty contest; he compared speculation to a newspaper beauty contest, where one is asked to pick out the prettiest faces among hundreds of photographs; and also most crucially to predict which is the most popular choice of all the entrants in the competition. So for example you may pick contestant number 54 – but sense that girl number 23 is the most popular. This is akin to looking at say the FTSE 100 list of stocks and you decide that you really like BP – but realise that the market really likes Vodafone.
Keynes held that to be successful in investment we have to choose not the ones we think are the “prettiest”, but the ones that we think everyone else will select. This piece of market thinking demolishes much of the supposed value of market analysts and commentators – what’s the point in knowing the best oil company in the market if all the price action is in say transport stocks? When Keynes first postulated this idea in the 1930’s it was considered somewhat radical and certainly didn’t conform to the standard views of rationality and assessing financial markets and assets in terms of fair value etc. Over time though, this idea has been developed further, now with a lot of interest being shown in market behaviour and psychology – though many market players and intermediaries seem to ignore it.
Finally, once again Keynes seems to prove the rule that successful market operators let their results speak for themselves. Only the also rans and hopefuls promote their ‘secret’ investment theories and systems, the successful just do it.

Three Blogs worth reading

Here are a few blogs I regularly read and find interesting

Accidental behavioural economist in search of wisdom. Uses insights from (behavioural) economics in organization development.                                                                                Koen Smets

Human Risk is a Behavioural Science-led Consultancy & Training company delivering BeSci for Risk, Compliance, Conduct & Ethics. Posts by Founder Christian Hunt       Human Risk Blog

Occasional thoughts from Michael Wilson – Veteran Business & Economics Broadcaster

Michael Wilson



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Lock Down Reading

The past few weeks have been an ideal opportunity to re-read some books.

I have particularly enjoyed these and think you might as well.

  • Why Most Things Fail – Evolution, Extinction and Economics by Paul Ormerod
  • Innumeracy -Mathematical Illiteracy and Its Consequences by John Allen Paulos
  • A Short History of Financial Euphoria by John Kenneth Galbraith
  • Phantoms in the Brain: Human Nature and the Architecture of the Mind by V.S. Ramachandran  and Sandra Blakeslee

Some Christmas Reading

I have enjoyed these, I think you will as well


Alchemy: The Surprising Power of Ideas That Don’t Make Sense By Rory Sutherland

Prisoners of Geography: Ten Maps That Tell You Everything You Need to Know About Global Politics by Tim Marshall

Range: How Generalists Triumph in a Specialized World by David Epstein

The Evolution of Everything: How New Ideas Emerge by Matt Ridley

Dancing by The Light of The Moon: Over to 250 poems, to read, relish and recite By Gyles Brandreth

The Inequality Paradox: How Capitalism Can Work for Everyone

Rebel Ideas: The Power of Diverse Thinking by Matthew Syed


Really looking forward to this – 17th March 2020

It has been a few years since I have shared a stage with Rory Sutherland. He is a legend in advertising circles (He is Deputy Chairman of Ogilvy), a best selling author,a columnist at The Spectator and his TED talks have over 7 million hits! So its a great pleasure to have him involved in this next Decision Event. It will be huge fun and extremely informative.
Full information and booking details here:

The Gene Kranz Dictum

If you don’t know Gene Kranz’s Dictum – print this off, keep it and re-read from time to time
“Tough and Competent”

“Spaceflight will never tolerate carelessness, incapacity, and neglect. Somewhere, somehow, we screwed up. It could have been in design, build, or test. Whatever it was, we should have caught it. We were too gung ho about the schedule and we locked out all of the problems we saw each day in our work. Every element of the program was in trouble and so were we. The simulators were not working, Mission Control was behind in virtually every area, and the flight and test procedures changed daily. Nothing we did had any shelf life. Not one of us stood up and said, “Dammit, stop!” I don’t know what Thompson’s committee will find as the cause, but I know what I find. We are the cause! We were not ready! We did not do our job. We were rolling the dice, hoping that things would come together by launch day, when in our hearts we knew it would take a miracle. We were pushing the schedule and betting that the Cape would slip before we did.

From this day forward, Flight Control will be known by two words: “Tough” and “Competent”. Tough means we are forever accountable for what we do or what we fail to do. We will never again compromise our responsibilities. Every time we walk into Mission Control we will know what we stand for. Competent means we will never take anything for granted. We will never be found short in our knowledge and in our skills. Mission Control will be perfect. When you leave this meeting today you will go to your office and the first thing you will do there is to write “Tough and Competent” on your blackboards. It will never be erased. Each day when you enter the room these words will remind you of the price paid by Grissom, White, and Chaffee. These words are the price of admission to the ranks of Mission Control.”

Summer Reading – 2019

It’s time for some reading suggestions for the summer months. Here are five that I think are very worthwhile.

Alchemy: The Surprising Power of Ideas That Don’t Make Sense. By Rory Sutherland

The Choice Factory: 25 behavioural biases that influence what we buy. By Richard Shotton

The Spy and the Traitor: The Greatest Espionage Story of the Cold War. By Ben MacIntyre

Eat Your Greens. By Wiemer Snijders

Diary of a Fund Manager. By David Miller