Animal Spirits and Risk in Financial Markets

Jukka Ilomäki
2018 Journal of Banking and Financial Economics  
Keynes argues that a beauty contest in financial markets is a combination of rational higher-order beliefs and market psychology or animal spirits. We find that a stable equilibrium, where also market psychology is included, can be possible if uninformed investors agree to reduce their required rate of return indicating that they enlarge the risk of their investment with the animal spirits component. JEL Classification: G11, G12 53 uninformed. In this article, the proportion of informed
more » ... s is 0 < μ < 1 and the focus is on the risk of uninformed investors, both with and without the animal spirits component. Samuelson (1973) argues that in efficient markets with risk-neutral investors, the following must hold: where t P is the equilibrium price, t V is the fundamental value,
doi:10.7172/2353-6845.jbfe.2018.1.3 fatcat:jsruw5sm2jef7erpmnbmxfoxwu