The Keynesian Beauty Contest in the Age of Financial Constructivism

Imagine you're in a contest. You're looking at dozens of faces and are asked to pick the six most beautiful ones. But here’s the twist: you’re not picking the ones you find beautiful. You’re supposed to guess which ones the majority of people will pick. So, you stop thinking about your own taste and start thinking about what others will think. Then, it gets even trickier — you begin to guess what others will think others will pick.

It sounds convoluted, but that’s exactly how economist John Maynard Keynes described the stock market. In his famous “beauty contest” analogy, investors aren’t valuing companies based on their fundamentals. They’re valuing them based on how they think others will value them. It’s not about objective truth — it’s about expectations layered on expectations.

Now, let’s fast forward to today’s financial world. That logic hasn’t just persisted — it has evolved. In today’s markets, shaped by 24/7 media, viral tweets, and investor sentiment, value is driven less by earnings reports and more by narratives. This is the world of financial constructivism, a view that markets are not just passively reflecting some external reality, but are actively constructing it through collective perception.

Financial Constructivism: When Belief Becomes Market Reality

Financial constructivism challenges the traditional, rationalist view of financial markets. It argues that market prices are not simply reflections of fundamental value (like revenues, profits, or assets). Instead, they are the result of shared beliefs, cultural scripts, and social dynamics. People act on what they think is true, and those beliefs shape prices, which in turn reinforce those beliefs.

Think of it as a feedback loop: narratives shape market behavior, which changes market outcomes, which further fuels the narrative. This is not to say fundamentals don’t matter, but rather that fundamentals themselves are interpreted through the lens of collective stories.

Case Study: Tunisia’s Ennakl Automobiles and the Arab Spring

The 2011 Tunisian Revolution offers a striking real-world case of financial constructivism and a perfect example of Keynes’s beauty contest logic in action.

As protests against President Zine El Abidine Ben Ali’s regime erupted, investors didn’t wait for legal reforms or corporate restructuring to reprice assets. Instead, they re-evaluated the value of companies closely linked to the regime based on expectations. One of the most notable was Ennakl Automobiles, Tunisia’s leading car dealership, known for importing major foreign brands like Volkswagen and Audi.

Ennakl had been acquired in 2004 by Sakher El-Materi, Ben Ali’s son-in-law. Under his leadership, the company benefited from preferential treatment (including advantageous import quotas) that gave it a dominant market position. Its success was tied not only to business acumen but to political proximity.

But when the revolution broke out and Ben Ali’s regime began to collapse, public sentiment turned sharply against regime-affiliated companies. Investors no longer saw Ennakl as a market leader, they saw a political liability. The result? A rapid drop in Ennakl’s stock price, driven not by changes in its financial performance, but by shifting expectations about its future in a post-regime landscape.

In this case, investors weren’t just asking, “Is this company profitable?” They were asking, “What will others think about this company in the new political order?” They tried to anticipate how public perception would change, how other investors would act, and how the market would respond. This recursive guessing game led to a kind of narrative-driven revaluation.

Global Echoes: The Same Logic, Different Stories

The story of Ennakl isn’t isolated. Similar dynamics have played out across global markets.

Take the 2022 Russian invasion of Ukraine. In the days following the attack, Russian stocks listed on international exchanges plummeted. Investors weren’t necessarily reacting to immediate balance sheet damage, they were front-running narratives about global sanctions, capital flight, and reputational risk. Companies like Gazprom or Sberbank saw their valuations collapse as the market collectively anticipated what others would soon believe.

Another dramatic example is the GameStop short squeeze of 2021. A wave of retail investors on Reddit’s WallStreetBets created a new kind of market narrative, one that revolved not around a company’s intrinsic value, but around collective action. Investors believed that if enough of them acted in unison, they could trigger a short squeeze and beat the hedge funds. It was a self-fulfilling prophecy. The narrative itself generated momentum, which drove the price up, and the price movement, in turn, validated the story.

At first glance, markets seem like the ultimate objective arena — driven by numbers, earnings, and rational decision-making. But the deeper you look, the more you realize that markets are human. They’re built from beliefs, emotions, and anticipations. They’re moved by headlines, hopes, and fears. They’re shaped by the collective stories we tell.

The Keynesian beauty contest metaphor captures the recursive, psychological nature of investing: it’s not about knowing the truth; it’s about knowing what others will believe is the truth. Financial constructivism takes this a step further, showing us that value isn’t just reflected by markets … it’s created by them.

Whether it’s Ennakl in Tunisia, Russian energy stocks, or GameStop’s Reddit-fueled rally, one thing is clear: financial value is never just numbers on a spreadsheet. It’s a social construct — fragile, fluid, and deeply human.

references:

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