Two Ways of Picking Winners
By TAN Kee Wee
(MediaCorp 938LIVE’s Money Talks, Thursday, 20 August
2009, 7.50 am and 7.20 pm)
This weekend, over 80 young women will compete to see
who is the fairest at the Miss Universe beauty pageant in the
Bahamas. In this contest, the winner will be decided by the
opinions of a handful of judges.
In some other contests, the beauty queen is decided by
votes from the audience. It’s something like the Singapore Idol
competition. If you are in the audience, you will vote for the
girl who has the attributes you think are most
For instance, if you think that girls with curly hair
are prettier and smarter, you would vote for the curly-haired
girl. And if everyone thinks the same way, your preference
would be the winner.
Usually, in such a beauty contest, there is another,
second contest going on with the bookies. In this second
contest, the prize goes to the person who picked the girl whom
the audience has voted as the next Miss Universe.
If you participate in this second contest with the
bookie, you can do one of two things. You can vote for the
curly-haired girl, because you like girls with curly hair. But
letting your preference dominate would be the wrong
The right move, if you want to win the prize from the
bookie, will be to think what the audience’s perception of
beauty is. Let’s say that the audience prefers girls with
straight hair. Then, you should ignore your preference and vote
for the girl with the straight hair.
Investing in the stock market is like this. If a stock
price is going to rise, there should be enough people who are
willing to pay a higher price than the price you
This situation was highlighted by John
Maynard Keynes, one of the most prominent
economists of our time.He used the idea of a beauty
contest to explain stock market price movements in his
famous book “The
General Theory of Employment, Interest and
Basically, a stock investor can choose to buy one of two
types of stocks. Either he buys the stock which he thinks has
the best value, or he buys the stock which all other investors
think have the best value.
Needless to say, the smart investor must ignore his
own preference, find out what the public perception is, and buy
the stock which others think have the best value.
This behavior explains why in a bullish market, speculators
are willing to pay crazy prices for a lousy stock or property.
They know it isn’t worth that much. They would be stupid to buy
it. But if they believe they can find a more stupid person to
buy it, they’ll take it now.
Of course, this behavior of first checking what others
think before we pick our winning investments cannot always
apply, nor do we want it to apply always.
For instance, when we buy a home, it’s good to look at
its investment potential. But this aspect can be ignored if the
home is near the in-laws, or it’s near the office. This
thinking doesn’t make us lousy investors, especially when the
winners we pick fall into a different investment
Let’s take an example. When we choose a spouse, we
choose the one with the characteristics we want. There is no
need to check whether others find your potential spouse more
desirable. Because, down the road, we are very unlikely to make
money selling the spouse.