The Keynesian Beauty Contest


Last time we delved into how to behave when you think the market is being irrational. I talked about the virtues of selling before a card peaked to maximize the number of people who would be buying as the card was rising and therefore would have more confidence in their ability to make money as the card had not yet peaked. Those buyers are the eponymous greater fools and they are an essential part of the market, both rational and irrational. I mentioned then that this theory correlated with something called the “Keynesian Beauty Contest” and I spent the last week or so thinking about that concept and how it applied to the market. Let’s dig in.

The Name of the Game

The simplest possible example, albeit not the most illustrative, was Keynes’ original example, the “beauty contest” example. Imagine there is a contest in a newspaper with several photographs of women. The rules state that you mail in a selection of one of the photographs and whichever gets the most votes will be deemed the most beautiful and every person who voted for the winner is eligible for a prize. In a scenario like this one, there is no incentive to behave irrationally, you’re simply trying to pick the winner.

This example and the subsequent theory associated with it got me thinking about the dozens of examples in the Magic market. We said it’s best to behave rationally and that’s true. However, there are multiple dimensions we need to consider and it may not be as simple as we think right off the bat.

The Different Levels

A first-level thinker will pick the girl he thinks is the most beautiful. “Snap asian girl, not close” he says, using Magic community slang because I invented him and I can make him say whatever I want. He’s a rational guy after all. Asian women appeal to him so he sends off his answer and waits for his prize to come in the mail.

A second-level thinker is going to really delve a bit deeper into the heart of the problem. The actual name of the game isn’t to pick what you like and hope your tastes correlate with the norm. That seems risky and there is too much variance in what people might think. Provided there are enough second-level thinkers they are in a better position here because they tend to behave the most rationally. I’ll explain. Say a second-level thinker also prefers the picture of the asian woman. I am beginning to regret going racial with this and I probably should have just separated them by hair color, but stay with me. The best part about this is that the second-level thinker is going to pick the girl he thinks the majority will go for, irrespective of his own personal inclinations and if that’s not wild enough, think about what will happen if there are mostly second-level thinkers in the contest. A second-level thinker will assess all of the photos, determine that the blonde, western-looking woman is closest to the traditional Western definition of beauty and make the determination that she is the one who will get the most votes even if they prefer another girl. The even more wilder part is that you could get a situation where 100% of the people personally prefer the asian, or redhead or whomever, but the first-level thinkers who pick her will lose because all of the second-level thinkers will think that the others will pick the more traditional-looking girl. They will either think that the others will think she is the most beautiful, or they will think the others will think that everyone will think that. In other words, they know the “right” answer and pick that even if it’s not the true answer.


In practice, many people are second-level thinkers provided the example is as straight-forward as the beauty contest. It could be anything, pictures of cars, flavors of ice cream; NPR’s Planet money did it with internet videos. Enough people know that the “right” answer is always “cat video” even if there is a hamster sneezing or something equally adorable. It’s not about the “true” answer, it’s about what everyone else is likely to think everyone else will think.

Adding More Levels

You can go beyond first and second-level thinking by making the problem more complex. This is better for our purposes because the way cards fit together in the vast framework of a metagame and multiple formats is more complicated than “pick the best removal spell out of a list of three spells.”

Imagine you are asked to pick a number between 1 and 100, but the number you pick isn’t just a random number because the winner is the person whose number is the closest to 2/3 of the average of what everyone says.

In this case, we need to make the first-level thinker dumber. He’ll snap 27 because it’s his favorite number.


Second-level thinkers will likely say 2/3 of 50. They’ll reason that everyone else is a moron, guessing randomly. The random distribution should, in theory, average out to 50 and therefore 2/3 of 50 is the right answer.

Third-level thinkers will reason that everyone else is likely a second-level thinker and therefore the answer will be 2/3 of 2/3 of 50. If you think everyone else is a third-level thinker, maybe you want to go 2/3 of 2/3 of 2/3 of 50. Maybe not.

First Level Magic

A Commander deck was printed with a card in it that sells for more than the total cost of the deck. Obviously you go buy Mind Seize and crack it to sell True-Name Nemesis for value. You’ll spend $30 and make $5-$10 on top of recouping the initial $30 and have 99 free cards. Repeat Ad Nauseum. Might I suggest that that’s first-level thinking?

If you want to think second-level and above (if there is a third level to this example) you need to imagine that everyone is going to be cracking Mind Seizes and selling the Nemeses. What can you do to capitalize on a market behaving this way? For starters, they will undervalue the other 99 cards they get. Some people are doing this to get free cards, most just want the Hamilton that comes from the quick flip. This behavior is going to put downward price pressure on the value of Sol Ring and Baleful Strix for starters. Second-level thinking involves picking up cheap Sol Rings from people who are undervaluing them. We’ve seen the price of Sol Ring dip and rebound before, there’s no reason to think it won’t again, even with all of the copies hitting the market. Since the decks are only getting reprinted at the rate that the worst-selling deck needs reprinting, there won’t be infinite Sol Rings injected into the market. The price will recover, and you’ll be glad you bought very cheap. The same can be said of Strix which sees more and more play every day. Buying cards that are likely to be undervalued is a good way to capitalize on a market with a lot of first-level behavior going on.

A first-level thinker will often speculate on a card based on their own interpretation of its power level. “I think Biovisionary’s effect is powerful” is a good example. Sure, you might like it, but there’s no money in hitching your wagon to Biovisionary, the asian woman of card picks. Here’s the painful part for me; I have been guilty of first-level fallacies myself and a lot of us still are because we don’t realize that we’re thinking on such a primary level. You want to know the battle cry of the first-level thinker? You won’t like this, I didn’t.

“This has been insane in our testing”

I get teased for throwing my support behind the card Seance even though I made some money on that card. I fell victim to the “this is insane in our testing” mentality and I thought that all I needed to do was tell enough people how good it was and they’d eventually test it and come to the same conclusion. I was thinking about how much I liked the picture of a Seance and not thinking about how everyone else was going to pick something else. Second-level thinking would have been noticing that Brad Nelson had brewed a deck that was nearly identical to ours but ran 0 Seance and was winning without it. Irrespective of how much that card improved the mirror, the winner of the contest was going to be Brad Nelson’s blonde-haired, blue-eyed girl next door, and thinking different was, well, first-level.

Finally, the MODO “crash” when a lot of prices tanked and people threatened to quit over the temporary suspension of daily events, a lot of first-level thinkers saw opportunity. With prices tanking, there was a chance to buy low and sell high later. The best part about this example was the conclusion that second-level thinkers came to. The real beauty here is that first-level thinkers aren’t always wrong, what they are is useful.

A second-level thinker saw that opportunity and reasoned that a lot of people were going to buy into MODO for the sake of potential profit. Regardless of MODO continuing to be a good gaming community, Redemption is coming up and was unlikely to be affected by the downtime. Second-level thinkers reasoned that all the first-level thinkers buying in for profit were going to stabilize prices. This made it safe to buy in on Theros block staples that would be essential come rotation and speculate on booster packs because they would be more scarce with fewer being won as prizes in events.

Heck, third-level thinkers probably imagined some of the second-level thinkers were going to stabilize booster pack prices despite them tanking initially, making early booster investment a safe bet.

Wouldn’t you know it? That’s exactly what happened.

How to Be Going Forward

If you can stay away from some of the pitfalls that beset the first-level thinker and reason what the herd behavior is going to do to the market, you can stay ahead of it and really make some good decisions. Remember, there’s no money in being average. Not when 2/3 of average is the name of the game.

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2 thoughts on “The Keynesian Beauty Contest”

  1. So would you advise always staying off level one? I would think that trying to guess the card that will get played before anyone else would yield the greatest profit, although at greater risk. What factors, if any, would you consider before buying into a level one card?

    1. Man, it’s hard to know. I really hope we all make our Scion money back, but you’ve seen how much resistance you face trying to get people to adopt your deck, even though it’s got a proven track record. I think you can make a level 1 play like “Wow, this card is good and no one is talking about it” because, unfortunately, that is the where the most money is made.

      You know what? There is an entire article in my potential reply here. Thanks for the question!

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