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Journal of Economics and Finance

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07-06-2016

Animal spirits, beauty contests and expected returns

Author: Jukka Ilomäki

Published in: Journal of Economics and Finance | Issue 3/2017

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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.

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Title: Animal spirits, beauty contests and expected returns
Author: Jukka Ilomäki
Publication date: 07-06-2016
Publisher: Springer US
Published in: Journal of Economics and Finance / Issue 3/2017
Print ISSN: 1055-0925
Electronic ISSN: 1938-9744
DOI: https://doi.org/10.1007/s12197-016-9364-8

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