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A Keynesian Beauty Contest in the Classroom


Rosemarie Nagel


Game Theory
Macroeconomics and Monetary Economics


Non-computerized experiment


Most models of economic behavior are based on the assumption of rationality of economic agents and common knowledge of rationality. This means that an agent selects a strategy that maximizes his utility believing that all others do the same (are equally rational) and that all agents believe that all others believe that all agents are rational etc. The p-beauty contest game is an appropriate game to test the assumption of this kind of reasoning. In this game a player has to guess what the average choice is going to be and the player will win if his choice is closest to some fraction of the average choice. This experiment can be introduced in many different courses and at all levels of teaching. For example, it can be used in game theory in order to discuss the problems of iterated elimination of (weakly) dominated strategies and the issue of common knowledge of rationality; in macroeconomics to discuss rational expectations; and in microeconomics to discuss strategic interaction between players.


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