Published on Jan 30, 2026
This article was written by Adem Tumerkan
Content Editor, Dunham | 2025 ThinkAdvisor Luminary Award Winner | 2026 Wealthies Finalist — Thought Leader of the Year | Macroeconomics, markets, geopolitics & global trends
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Can you believe it? Christmas is around the corner already.
2025 has packed plenty of chaos - geopolitics, yield spikes, trade drama, inflation scares, AI euphoria, and everything in between. But as clients melt into holiday mode, I wanted to take things lighter today.
No repo plumbing. No sovereign-debt rants. No yelling about government spending (yet).
Instead, let’s talk about your mental toolbox.
Today’s tool - and the one I believe every advisor should know - comes from John Maynard Keynes, who understood investor psychology decades before behavioral finance existed.
Let’s break it down. . .
We all like to think we are rational actors who use logic to make our decisions.
We look at a balance sheet. Calculate intrinsic value. And buy when the price is lower than that value, believing it will always revert to that baseline.
Simple, right?
Except - unfortunately - that’s not how markets usually work.
John Maynard Keynes - known as the father of modern macroeconomics and a brilliant thinker - hit the nail on the head nearly a century ago with his concept of the “Beauty Contest”.
Here's the gist: Imagine a newspaper runs a beauty contest where you have to pick the six faces that are the "most beautiful" from a hundred photographs.
But here’s the angle - the prize is awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole.
Meaning if you pick the faces you truly find the best looking, but nobody else does - you lose.
Thus, to win, you have to disconnect from your own taste and instead must ask, “Which face do I believe the others will think is the prettiest?”
This type of 4D Chess means you must think several moves ahead of the crowd.
Now, think about investing. You're not paid for finding the stock you believe offers the best value. You're paid for finding the stock that the most people will believe has value tomorrow.
For an advisor, this is important because it helps explain why clients chase bubbles. They aren't looking for value - they are looking for what everyone else is validating.
This is what made Keynes different.
He wasn’t just describing a game - he was diagnosing how financial markets actually work.
Said another way- he realized that markets aren’t cold calculators. They’re crowds - and crowds trade on emotions, biases, and expectations.
Keynes understood - long before behavioral theorists like Kahneman or Thaler - that humans suffer from what we now call bounded rationality.
Put simply, people don’t have infinite time, perfect information, or endless analytical horsepower. So instead of digging for intrinsic value, they look around, read the room, and follow the herd.
Thus, in markets, that herd behavior isn’t a side effect. It's the mechanism.
And this brings us to the Beauty Contest’s wild cousin - the Greater Fool Theory.
If the Beauty Contest explains why people chase trends, the Greater Fool Theory explains how far they’ll go.
Meaning, you’re not buying because you believe something is intrinsically worth it - you’re just buying because you think there’s a "greater fool" who will pay more for it.
Together, the Beauty Contest and Greater Fool Theory help explain nearly every mania you see today - meme stocks, crypto cycles, AI melt-ups, housing frenzies, even the 2020–2021 everything-bubble dynamic.
None of it requires fundamentals. It requires expectations - specifically, expectations about everyone else’s expectations.
Sometimes (more often than not), people don’t chase real value – they chase validation.
They want to be where “everyone else is.” They want confirmation - not calculation. The Beauty Contest explains why clients' FOMO (fear of missing out) into bubbles, why they panic during corrections, and why they always seem to chase the narrative of the moment.
This context and framework give advisors a way to talk about those behaviors without shaming the client or lecturing them about valuations.
Keynes understood the uncomfortable truth – that markets often reward you for understanding the crowd more than understanding the company.
Fundamentals matter - eventually - but psychology usually moves first.
After struggling early in his investment career, Keynes stopped trying to outguess the crowd at every whim.
He realized that short-term price movements are mostly a guessing contest, layered with flawed assumptions about what other flawed people might do.
Thus, instead of timing the Beauty Contest, he focused on value investing - buying assets beaten down by fear and selling when greed returned.
He realized you can’t win a game where everyone keeps guessing everyone else’s guesses.
But you can help your odds by understanding how the psychology around it moves.
The Keynesian Beauty Contest belongs in every advisor’s mental toolbox because it explains so much of what drives modern markets - bubbles, manias, panics, sudden re-ratings, changing narratives, and the constant tug-of-war between valuations and expectations.
The point is, you’re not just investing in companies. You’re investing in what other people believe about other people’s beliefs about those companies.
And by helping clients understand that, things can start making a lot more sense.
Stay tuned for Part II next week.
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