The Wisdom Of Crowds

At least some of the justification for financial markets comes from the concept of the “Wisdom Of Crowds“: the idea that lots of people making informed guesses leads to an accurate valuation or prediction.

The problem is that the wisdom of the crowds only really applies when forecasts are genuinely independent, as when farmers are guessing the weight of a bull at a country fair.

In most financial markets, forecasts are not genuinely independent: everyone looks at everyone else’s views while they are forming their own, and there are feedback mechanisms (see Soros). Once you know what others are thinking, their views lead you into error.

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