Keynes always likened speculative stock markets to a ''beauty contestant in which judges vote not for who they find the most beautiful but rather for who they feel others will find more beautiful.''
Therefore he concludes that the ''real value of the stock is not reflected''.
Firt of all we know there is no''real'' value of what should be. Value is subjective.
Putting that aside I want to further explore his analogy and 'prove' that his analogy does NOT mean that ''the ''real'' value won't be reflected.''
Imagine 5 judges, each judging 10 women and most of them say the last woman is the prettiest.
Imagine you go back in time, same judges, same women only this time the rules are to ''vote for whoever you believe other judges will like the most''.
You know what I think, the results would still be the same.
Here is why, in selecting who you think others will like, there has to be something influencing your decision. Some factor has to influence who you think others will find hot. It's not a random decision.
The person you find hottest is the person you would pick anyway becuse you think others will find her hot too.
Inadvertently and perhaps not realized by the judges, deep down he would not be picking who he thought others will like but who he likes.
So again Keynes is wrong in saying that in the 2nd scenario the 'rea' value won't be reflected.
I hope I have not confused anyone.
Where was the interesting question?
You've got a good eye, but your conclusion on the pagent results has a flaw: by being told to vote for who they think everybody else will vote for, the judges become more concious of their little quirks as they try to control for them; this process can cause a different result if they think another contestant is closer to the "objective" standard of beauty.
Of course, this bizarro-pagent is only an analogy for short-term investments(the buy low, sell high variety) - long term ones(the kind you buy for the dividends) will be based solely on which companies the investor thinks least likely to default.