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faces from a hundred photographs. The prize was awarded to the competitor whose choices came closest to the average preferences of all of the competitors as a group. Of course, to win such a competition one should not pick the faces one thinks are prettiest. Instead, one should pick the faces that one thinks others are likely to think the prettiest. But even that strategy is not the best, for certainly others are employing it too. It would be better yet to pick the faces that one thinks others are most likely to think that others think are the prettiest. Or maybe one should even go a step or two further in this thinking.8 Investing in stocks is often like that: Just as with the beauty contest, in the short run one wins not by picking the company most likely to succeed in the long run but, rather, by picking the company most likely to have high market value in the short run.

The Delicious Apple offers another metaphor for much the same theory. Hardly anyone today really likes the taste of the varietal now called Delicious. And yet these apples are ubiquitous. They are often the only choice in cafeterias, on lunch counters, and in gift baskets. Delicious Apples used to taste better, back in the nineteenth century when an entirely different apple was marketed under this name. The Delicious varietal had become overwhelmingly the best-selling apple in the United States by the 1980s. When apple connoisseurs began shifting to other varietals, apple growers tried to salvage their profits. They moved the Delicious Apple into another market niche. It became the inexpensive apple that people think other people like, or that people think other people think other people like. Most growers gave up on good taste. They cheapened the apple by switching to strains with higher yield and better shelf life. They cheapened it by clear-picking an entire orchard at once, no longer choosing the apples as they ripened individually. Since Delicious Apples are not selling based on taste, why pay extra for taste? The general public cannot imagine that an apple could be so cheapened. Nor does it imagine the real reason these apples are ubiquitous despite their generally poor taste.9

The same kind of phenomenon occurs with speculative investments. Many people do not appreciate how much a company with a given name can change through time, or how many ways there are to debase its value. Stocks that nobody really believes in but that retain value are the Delicious Apples of the investment world.

RECOMMENDED READING

Allen, Franklin, Stephen Morris, and Hyung Song Shin (2002). “Beauty Contests, Bubbles, and Iterated Expectations in Asset Markets.” Unpublished paper, Yale University.

Barberis, Nicholas, and Richard Thaler (2003). “A Survey of Behavioral Finance.” In George Constantinides, Milton Harris, and René Stulz, eds. Handbook of the Economics of Finance. New York: Elsevier Science.

Campbell, John Y., and Robert J. Shiller (1987). “Cointegration and Tests of Present Value Models.” Journal of Political Economy 97, no. 5: 1062-1088.

Higgins, Adrian (2005). “Why the Red Delicious No Longer Is.” Washington Post, August 5, p. A1.

Jung, Jeeman, and Robert J. Shiller (2005). “Samuelson’s Dictum and the Stock Market.” Economic Inquiry 43, no. 2: 221-228.

Keynes, John Maynard. (1936/2009). The General Theory of Employment, Interest and Money. Kindle: Signalman Publishing.

LeRoy, Stephen, and Richard Porter (1981). “Stock Price Volatility: A Test Based on Implied Variance Bounds.” Econometrica 49: 97-113.

Marsh, Terry A., and Robert C. Merton (1986). “Dividend Variability and Variance Bound Tests for the Rationality of Stock Prices.” American Economic Review 76, no. 3: 483-498.

Shiller, Robert J. (1981). “Do Stock Prices Move Too Much to Be Justified by Subsequent Changes in Dividends?” American Economic Review 7, no. 3: 421-436.

Shiller, Robert J. (1986). “The Marsh-Merton Model of Managers’ Smoothing of Dividends.” American Economic Review 76, no. 3: 499-503.

Shiller, Robert J. (2000). Irrational Exuberance, 1st ed. Princeton: Princeton University