A Game Theoretic Approach to Model Financal Markets: Guessing Game

How deep our reasoning and strategic thinking is and how strategic we think are crucial in making financial investment decisions because we need to guess how other people will behave. This paper studies Guessing Game (Beauty contest game) that helps us understand how people make decisions in environments where depth of reasoning plays a key role. We mainly summarize the findings of experimental studies focusing on this game and then link these findings to financial markets, especially to stock market players’ behavior. We also offer some extensions that may further contribute to produce better and more realistic models of financial markets.