[P]rofessional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one's judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees.NPR's Planet Money decided to put this to a test. They posted three cute animal videos - a loris, a kitten and a baby polar bear - on their website (videos here). One group of people was asked to vote on which was the cutest (i.e., to make a judgment about "fundamentals"), while the other voted on which was most likely to be voted cutest (to be the "speculators" in the market). The first group voted for the kitten, which received 50% (vs. 27% for the loris and 23% for the bear), and the second group also favored the kitten, by 76%.
That's a clever test, but if prices in financial markets played out like this example, then there wouldn't be a problem - the speculators are moving the market towards the correct fundamental value (that kittens are cutest). Indeed, the speculators get it right more decisively than the fundamental investors.
That's not the point Keynes was trying to make. He was very skeptical of the workings of financial markets. In the same chapter, Keynes wrote:
The outstanding fact is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made. Our knowledge of the factors which will govern the yield of an investment some years hence is usually very slight and often negligible. If we speak frankly, we have to admit that our basis of knowledge for estimating the yield ten years hence of a railway, a copper mine, a textile factory, the goodwill of a patent medicine, an Atlantic liner, a building in the City of London amounts to little and sometimes to nothing; or even five years hence. In fact, those who seriously attempt to make any such estimate are often so much in the minority that their behaviour does not govern the market.I think that indicates a weakness of the experiment - there really is no uncertainty that kittens are cute, or that kittens will be cute in the future, so the market can get that one right pretty easily.
Personally, though, I liked the polar bear.