GAME THEORY keynsian beauty contest 
Beauty Contest Experiment
The experiment executed in the seminar was very simple. Players had to choose a number between 0 and 100. The objective is to choose a number based on your guess of the mean guesses of the group and multiply it by 2/3. It is called the Beauty contest Experiment because it was based on a theory John Maynard Keynes proposed on the relationship of the stock market with beauty contests conducted in newspapers of his time. In this report I will examine the logic behind choosing the best response strategy in theory and compare it with the actual results of the experiment conducted. From the comparison I will provide justification for why the theory is different from reality by also comparing it to examples in real life.
To understand the underlying logic of the game’s strategy one must understand the Nash Equilibrium. Princeton University’s Website (an excellent source since John Nash the person who came up with the Equilibrium attended that university) defines Nash Equilibrium as “a solution concept of a game involving two or more players, in which each player is assumed to know the equilibrium strategies of the other players, and no player has anything to gain by changing only his or her own strategy unilaterally. If each player has chosen a strategy and no player can benefit by changing his or her strategy while the other players keep theirs unchanged, then the current set of strategy choices and the corresponding payoffs constitute a Nash Equilibrium.”1
The fundamental question now is to what extent is the concept of Nash equilibrium relevant and effective in the Beauty Contest Experiment and does it in fact exist. A definitive answer for the later question is easy because by mathematical logic there is. Simply said if all the players choose 0, no player could have been better off and no one has the incentive to change their strategy if the other players don’t change theirs. In Mathematical terms, a total of zero will yield an average of
The experiment executed in the seminar was very simple. Players had to choose a number between 0 and 100. The objective is to choose a number based on your guess of the mean guesses of the group and multiply it by 2/3. It is called the Beauty contest Experiment because it was based on a theory John Maynard Keynes proposed on the relationship of the stock market with beauty contests conducted in newspapers of his time. In this report I will examine the logic behind choosing the best response strategy in theory and compare it with the actual results of the experiment conducted. From the comparison I will provide justification for why the theory is different from reality by also comparing it to examples in real life.
To understand the underlying logic of the game’s strategy one must understand the Nash Equilibrium. Princeton University’s Website (an excellent source since John Nash the person who came up with the Equilibrium attended that university) defines Nash Equilibrium as “a solution concept of a game involving two or more players, in which each player is assumed to know the equilibrium strategies of the other players, and no player has anything to gain by changing only his or her own strategy unilaterally. If each player has chosen a strategy and no player can benefit by changing his or her strategy while the other players keep theirs unchanged, then the current set of strategy choices and the corresponding payoffs constitute a Nash Equilibrium.”1
The fundamental question now is to what extent is the concept of Nash equilibrium relevant and effective in the Beauty Contest Experiment and does it in fact exist. A definitive answer for the later question is easy because by mathematical logic there is. Simply said if all the players choose 0, no player could have been better off and no one has the incentive to change their strategy if the other players don’t change theirs. In Mathematical terms, a total of zero will yield an average of