Wishdom crowd stock market
Surowiecki was asked the question: Under what circumstances is a crowd smarter?
His answer was: There are four key qualities that make a crowd smart. They need to be diverse so that people bring different information to the table. It needs to be decentralized so that no one at the top dictates the crowd's response. It needs a way to summarize people's opinions into one collective verdict. And people in the crowd need to be independent to pay attention to their own information first and not to worry about what everyone around them thinks.
Let's take these four points and apply them to the stock market.
1. Diverse.
The US stock market is diverse, people bring different information to it and express their different opinions and different levels of knowledge and expertise through the price at which they buy and sell in the market. So we know we have a diverse market, and according to Surowiecki, that quality in the market or in the crowd helps make him smart.
2. Decentralized.
Most stock markets are decentralized and price determination is left to their own devices.
3. Collective Verdict.
The collective verdict of a crowd is often a smarter decision than that of an individual. In the market, we could say that the collective verdict is demonstrated in two ways, firstly through the direction of the trend and secondly through the closing price of individual shares.
The final quality any crowd needs to help distinguish a smart crowd from a stupid one is the independent thoughts and actions of an individual in the crowd. It refers directly back to the first quality of Diversity. When you get everyone acting independently, you get diversity, and when that diversity develops a common theme like a bull trend, then you know there must be something to it when you see so many people independently come up with the same answer. I would say that our market exhibits this behavior.
After qualifying and expanding on Surowiecki's four traits, I think we can safely say that our stock market crowd is a smart crowd as opposed to a naive crowd, and I emphasize this point on purpose because so many commentators tell us that the way to success as investors is to go against the crowd. They often suggest that we go it alone and be independent. There's nothing wrong with being independent, but if our independent decision-making takes you in the exact opposite direction of the rest of the market, it doesn't seem like a smart decision.
This article is based on material from the author's book, Trading Psychology: Winning the Mental Tug of War on Stock Markets, available on Amazon.