Why did investors react so strongly to the rating change, which, after all, was merely the opinion of a few analysts on a committee? And why did the market swing so much day to day, even when there was no significant news? John Maynard Keynes supplied the answer in 1936, in “The General Theory of Employment Interest and Money,” by comparing the stock market to a beauty contest. In fact, the best explanation for the market’s back-and-forth swings is that each day we are conducting a Keynesian beauty contest, and reassessing what others think that still others are thinking. On days without much news, the market is simply reacting to … Continue reading Robert J. Shiller