Saturday, January 17, 2009

Sometimes crowds aren't wise

I like Surowiecki's book, a lot, and I have experienced many instances where the collective judgment of a group was far better than even an informed individual. But the "wisdom of crowds" catchphrase is dangerous--oftentimes crowds are not wise at all.

We are experiencing right now an era in which crowds are really dumb. I'm referring to the financial markets and the related economic recession. The financial markets and news affecting the financial markets have merged into a massive echo chamber, wherein bad news begets pessimism which keeps prices down which begets another cycle of bad news.

We've seen this in reverse, of course. Do you remember 1998-1999, during which time everyone was watching CNBC or checking Yahoo Finance all day long, in real time assessing the value of their stock portfolios? Oversubscribed IPOs begat good news, which kept prices high, which begat more buying, etc., until it all came crashing down.

I thought it was clear to everyone that market groupthink, which afflicts us in good times and bad, obscured the true value of securities, and therefore paying close attention to news items in order to make sense of the markets and our economy was, at best, a waste of time.

But no. Felix Salmon, in his Portfolio Market Movers blog, points to a Financial Times article introducing us to a service from Reuters that collects news items and alerts traders when news trends indicate potential market movements.

In other words, lean into the echo chamber, and listen real hard for signals you can use to make decisions. Um, it's only January, but I will bet there's not a stupider product idea introduced for the rest of 2009.

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