ARE crowds full of wisdom or irrational mobs? The answer seems to depend on how their estimates are compiled. If their guesses are generated independently (the number of jelly beans in a jar, the weight of a cow at the country fair), then the crowd can be pretty accurate. But things can change if people are aware of others’ opinions. There is a tendency towards “anchoring” (basing one’s estimate on a fixed number, such as the average guess) and overshooting (the process that creates bubbles and crashes in financial markets). This can be a particular problem for investment-bank analysts forecasting company profits or economists estimating GDP growth: few like to go out on a limb, for fear of being humiliated or fired if they are wrong. In January 2008 the range of forecasts for economic growth in 2009 among governors of the Federal Reserve was 2.1-2.7%. The actual outcome was a decline of 2.8%.
The idea behind prediction markets is that wisdom trumps irrationality. Many are betting forums: gamblers stake cash on their ability to predict events such as the Republican nominee for president (Donald Trump is the current favourite, as in the...Continue reading
Source: Business and finance http://ift.tt/23enToe
EmoticonEmoticon