Swiss researchers have found that, while the “Wisdom of the Crowd” is usually a real phenomenon and not a sarcastic misnomer, the introduction of a feedback loop (knowing how other members of the crowd are behaving) impacts the efficacy of crowd sourcing. The Wall Street Journal reports (emphasis added):
The researchers gathered 144 Swiss college students, sat them in isolated cubicles, and then asked them to answer various questions, such as the number of new immigrants living in Zurich. In many instances, the crowd proved correct. When asked about those immigrants, for instance, the median guess of the students was 10,000. The answer was 10,067.
The scientists then gave their subjects access to the guesses of the other members of the group. As a result, they were able to adjust their subsequent estimates based on the feedback of the crowd. The results were depressing. All of a sudden, the range of guesses dramatically narrowed; people were mindlessly imitating each other. Instead of canceling out their errors, they ended up magnifying their biases, which is why each round led to worse guesses. Although these subjects were far more confident that they were right—it’s reassuring to know what other people think—this confidence was misplaced.
This is more evidence that investors should use their own valuations to drive their investment decision-making process, rather than starting with the market price (e.g. relative valuation, swing trading, etc).
Read the WSJ article here.
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