How to Question Crowd Wisdom in Real Life
Appeals to take the wisdom of crowds at face value are all around us. Here's how to tell the legitimately wise crowds from unserious ones.
James Surowiecki showed how groups of people could make prescient predictions and informed decisions - even if that group isn’t made of experts.
However, groups aren’t wise just because they’re large. The four elements that Surowiecki argues make crowds wise - diversity of opinion, independence, decentralization, and aggregation - aren’t present everywhere. One or two of them are often absent.
Think about the stock market. To most people, a stock’s price reflects the value of the company. It’s more correct to say it’s the value of what people are willing to pay for its shares. A company’s most recent round of layoffs may be a necessary cost-cutting measure, but a stock’s price can tank as a result.
It’s hard to know whether a stock’s price is justified without knowing internal performance metrics or relevant industry knowledge. So, it’s tempting to take stock prices at face value.
Until a group of Redditors shorted Gamestop stock in such high amounts that hedge fund purchases inflated the stock’s value by over 3,000%. It doesn’t take an Enron-level investigation into a company to know that Gamestop didn’t suddenly become 30 times more valuable.
Other cases like these are easy to catch in real life if you know how to see through them.
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