The Wisdom of Crowds.

[Phaedrus]

There is an interesting article in the Herald this morning about a newly published book entitled "The Wisdom of Crowds". The author's main hypothesis is that the sum of a crowd's intelligence is much greater than its parts.
I see many direct parallels here with the stockmarket. If a large enough group makes an estimation of the "worth" of a particular stock, the errors they make will tend to cancel one another out, giving a concensus of surprising accuracy. I have always been keenly aware that the market (in total) knows more than I do, but it may be that the market knows more than even the smartest people in it.

Here is a link to the article :-
http://www.nzherald.co.nz/storydisplay.cfm?thesection=news&thesubsection=&storyID=3574855

Technical analysis studies the villager's estimates, not the ox!

[Gryffyn]

Excellent.

[Dimebag]

One immediate error that emerges from the study, (if one is looking to apply the results to financial markets), is encapsulated in this paragraph towards the bottom of the article:

"The mathematics works so long as his three key criteria - independence, diversity and decentralisation - are satisfied"


The key problem is that in the market people's decisions are not made independently of others' decisions, but are often influenced significantly by them.

On who wants to be a millionaire, presumably everybody selects the answer they think is right independently. In the market much buying and selling is influence by the prevailing price. This changes the applicable conclusions completely.

Dimebag

[skinny]

You bet me to it dimebag ! You could also argue that violation of at least 2 of the 3 criteria is what is behind herd behaviour driven booms and slumps in asset prices - i.e. because the majority don't act independently the diversity in opinion, that might otherwise result in fairly valued prices, is swamped.

[KJ]

I can understand how it would work generally.However,in areas where special expertise is required this would not be the case.
eg a qualified medical doctor versus an unqualified group of people diagnosing a medical problem or Buffett analysing a coy versus a group of amateur investors.

[Capitalist]

Well, I disagree totally with that piece of crap. So far, markets have been pretty capable in distinguishing reality from propaganda, to the dismay of countless political meddlers.

History suggests the most money has been made by contrarians like Sir John Templeton.In 1939, with Hitler gaining in Europe, he bought every stock trading below $1 on the New York and American stock exchanges and quadrupled his money in four years. "Invest at the point of maximum pessimism," he says. How does that fit in with the sheeple?

[Longtack]

Cabbies are my contrarian barometers.

[Alban]

Surowiecki seems to be re-hashing the largely discredited efficient market theory. Agree with you about the independence of action Dimebag.

[zyreon]

oh yay, just got course material for 125.342 Investment Planning

one of the topics is on efficient market hypothesis... ugh I will probably have to just pretend to conform in order to collect my grades. Though I could artfully subtley show my contempt and disdain... discreetly...