Crowded Thoughts
by Samuel Jones
James Surowiecki - he of the Wisdom of Crowds - has an article in this week's New Yorker. In it, he argues that 'when people talk about the ongoing tumult in the stock market, they typically blame the investors' lack of information ... but this information isn't necessarily making investors, or the market any smarter. In fact, what may be driving the market crazy of late is that it knows too much'.
For Surowiecki, 'markets work best when investors are thinking for themselves, and tend to go awry when the obsession with what everyone else is doing becomes a dominant concern'.
To a point, yes. But his article also raises some questions in relation not only his own Wisdom of Crowds thesis, but also other bestsellers, like The Long Tail. Both of these have their critics, but - by equal measure - their values. They certainly highlight trends in the way that masses of us react to masses of information. However, because these are trends as much as they are ideas that might influence investors or businesses in reacting to a market, they also raise important questions about skills we all need.
It's not that masses of information is a bad thing, far from it. What is an issue, however, is how we manage it. The more we know, the more fragmented we can become, and - as Onora O'Neill wrote in her Reith Lectures - the harder it becomes to trust and operate within the institutions by which we seek to manage our society, and that ranges from businesses and Local Authorities to the very idea of the market.
The information Surowiecki writes about in his New Yorker article could well be applied to the public's wider exposure to a vast range of cultural stimuli, from food to websites, and from TV programmes to publishing. That leads to some big questions - if we've seen an apocalypse in the markets that has resulted in part from a surfeit of information, what is happening more generally? What lessons can we take about how we approach, manage and react to information?
in 2006, Time Magazine's Person of the Year was 'You'. Two years earlier, the Economist invited readers finally to relieve James I of his title, and nominate the wisest fool of the past 50 years. Maybe, as we take a gulp, and look at the world after the apocalypse, we should look wider than the markets. What's the wisdom guiding the crowds? If the crowd got its recognition in 2006, what will help it avoid becoming a fool by 2060?
Will Davies
I was thinking the other day that there is (to my limited knowledge) a strange gap in debates about behavioural finance, experimental economics and nudging. We spend our whole time analysing how 'people' 'actually behave', discovering that they are irrational, herdlike and prone to panic (really?). But what's equally interesting from this sort of post-rationalist perspective are the exceptions - the small minority of people who are basically like neo-classical economics states. You say that lots of information doesn't make people smarter... unless you're a genius investor who is capable of cutting out the noise. The ability to navigate a market rationally must not only depend on analytical skills and tools, but surely also on character traits that make one impervious to the psychological tendencies that afflict the rest of us.
If we could get Warren Buffett or George Soros in a laboratory for a few hours, the interesting thing to research would be what is it about their personalities, foibles, selves, mothers that makes them so impervious to nudges, collective hysteria, informational noise. Homo economicus does occasionally exist, and he's very rich.