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306 pages, Paperback
First published May 19, 2004
“...an investor who proposes to ignore near-term market fluctuations ... will in practice come in for most criticism, wherever investment funds are managed by committees or boards or banks. For it is in the essence of his behaviour that he should be eccentric, unconventional and rash in the eyes of average opinion. If he is successful, that will only confirm the general belief in his rashness; and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy. Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”Keynes is actually praising the long-term investor but stating how hard it is to not simply follow the crowd. This is the opposite of what Surowiecki uses him for.
“Professional investment may be likened to those for newspaper competitions in which competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of other competitors, all of whom are looking at the problem from the same point of view.”He then goes on to state that that behaviour is what Keynes “recommends”. This is not only not what Keynes recommends, but what he is against. The statement quoted is Keynes’ description of how the stock market works: people speculating rather than making up their own mind based on fundamentals. He then explains that this is why there are bubbles and crashes: because people are simply following the herd. Again, the total opposite of what Surowiecki uses him for.
Andreassen divided students into two groups. Each group selected a portfolio of stocks, and knew enough about each stock to come up with what seemed like a fair price for it. Then Andreassen one group to see only the changes in the prices of their stocks. They could buy and sell if they wanted, but all they knew was whether the price of a stock had gone up or down. The second group was allowed to see the changes in price, but was also given a constant stream of financial news that supposedly explained what was happening. Surprisingly, the less-well-informed group did far better than the group that was given all the news... the students who had access to the news overreacted... The students who could look only at the stock’s price had no choice but to concentrate on the fundamentals that they had used to pick their stocks to begin with.The thing is, financial information is exactly what the fundamentals are supposed to be. The entire idea behind financial information is that you know what is happening to the company, and hence what its future prospects are, rather than being in dark and just speculating.
The banal but key point I’m trying to make is that the more important the decision, the less likely a cascade is to take hold.To translate that, he’s saying that when we have to make important decisions, we tend to listen to other people less and rely on our own judgment more. Really? Tell that to the people who sunk their life savings into Savings & Loans, into internet stocks, into mortgages they couldn’t afford. The opposite is in fact often true: that when we are faced with a major decision that can have long lasting consequences, we often follow what seems to have been successful for everyone else.
Diversity of opinion: “Collective decisions are only wise when they incorporate lots of different information.” If everyone thinks the same way and has the same background, a crowd will be no smarter than an individual. The individuals in the crowd need to bring their own experiences and knowledge to be effective.All in all, worth reading. Maybe don't try to do it overnight.
Independence: When one person makes a prediction after hearing other people’s first, this can affect the outcome and cause a “cascade” effect. “The problem,” he says, “starts when people’s decision are not made all at once but rather in sequence…People fall in line because they believe they’re learning something important from the example of others…after a certain point it becomes rational for people to stop paying attention to their own knowledge—their private information—and to start looking instead at the actions of others and imitate them.”
Decentralization: “The virtues of decentralization are twofold. On the one hand, the more responsibility people have for their own environments, the more engaged they will be…The second thing decentralization makes easier is coordination. Instead of having to make constant resort to orders and threads, companies can rely on workers to find new, more efficient ways of getting things done.”
Aggregation: Crowds are useless if the diverse opinions are not aggregated in some way. This is often the downfall of decentralization: “Decentralization’s great weakness is that there’s no guarantee that valuable information which is uncovered in one part of the system will find its way through the rest of the system.”
“Galton undoubtedly thought that the average guess of the group would be way off the mark. After all, mix a few very smart people with some mediocre people and a lot of dumb people, and it seems likely you’d end up with a dumb answer. But Galton was wrong.” [p.xiii]
“And trusting an insulated, unelected elite to make the right decisions is a foolish strategy, given all we now know about small group dynamics, groupthink, and the failure of [cognitive] diversity.” [p.267]
“...independence of opinion is both a crucial ingredient in collectively wise decisions and one of the hardest things to keep intact.” [p.39]
“Thomas Jefferson, for one, thought it likely that they [experts] might be worse. ‘State a moral case to a ploughman and a professor’ he wrote. ‘The former will decide it as well as and often better than the latter because he has not been led astray by artificial rules.’” [p.267]
“...there’s little correlation between an expert’s confidence in his judgement and the accuracy of it. In other words, experts don’t know when they don’t know something.” [p.278]