Wisdom of Crowds

Categories: Metrics, Trading

Wisdom of crowds may be the antithesis of mob rule. Wisdom of crowds refers to the idea that two brains (or many, many brains) are better than one. Large groups of people can come up with ideas, solve problems, and make astute observations and predictions better than one person, even if that person is supposed to be an expert.

The term comes from James Surowiecki’s book, The Wisdom of Crowds, which launched in one of the worst years for haircuts since the '80s: 2004. Yet, as you can probably guess, Surowiecki wasn’t the first human to think such things. If we go waaaay back, we can see that Aristotle’s theory of collective judgement in Politics is pretty much the same idea.

How does wisdom of crowds work? For one, it can help prevent bias. If there’s a bratwurst fan watching a what’s-the-best-sausage competition, they might be biased that the brat will win. A crowd of people who have different opinions on the contestants will come up with a better average guess of which sausage will win, which brings us to the second way wisdom of crowds works: averages. The average of guesses of a group might be closer to the truth than one expert’s guess.

Yet again, mob rule is an example of crowds not being very wise. Things like stock market bubbles that are the result of over-hyped stocks and markets are great examples of people being not-so-wise together. In order for a crowd to be full of wise-guys, the crowd needs to hold a wide variety of opinions, and one person’s opinion shouldn’t influence another person’s opinion. Rather, everyone’s opinion must be based on their own knowledge. This is just about the opposite of any stock market situation, which rises and falls largely because everyone is influenced by each other’s decisions.

Be a wise guy, and stick to the guns of your own knowledge.

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