The Keynesian Beauty Contest in Digital Asset Markets: Higher-Order Beliefs, Informational Cascades, and Retail Speculative Bubbles

Abstract

AbstractNeoclassical asset pricing models, such as the Efficient Market Hypothesis (EMH), assumethat asset prices reflect the discounted present value of expected future cash flows. Duringperiods of speculative market euphoria, however, pricing dynamics frequently detach fromunderlying economic fundamentals. This paper examines the microfoundations of modernspeculative bubbles by synthesizing John Maynard Keynes’s concept of the “beauty contest,”game-theoretic models of higher-order beliefs (p-beauty contest games), and the theory ofinformational cascades. We analyze how social media platforms and decentralized retail co-ordination function as digital transmission vectors that amplify herd behavior and narrativecontagion (Shiller, 2017). Drawing on experimental asset-market literature and recent retailtrading episodes, we show that market participants frequently act as higher-order strategicpredictors rather than fundamental evaluators, and that cognitive biases – social proof, thebandwagon effect, and regret aversion – render retail investors especially vulnerable to se-vere drawdowns once informational cascades collapse. We conclude by proposing a two-tierframework of individual heuristics and structural market safeguards intended to narrow thisgap between fundamental rationality and consensus-driven speculation.