by Alex Tabarrok
One of the benefits
of tapping the wisdom of the crowds is that the market doesn’t lie*.
Not
even white lies, as Lars
Christensen found to his chagrin when he recently gave a talk
to investment advisors in the Danske Bank group:
As I was about to
start my presentation somebody said “The audience have been kind of quiet
today”. I thought that was a challenge so I immediately jumped on top of a
table. That woke up the crowd.
I ask the audience
to guess my weight. They all wrote their guesses on a piece of paper. All the
guesses was collected and an average guess – the “consensus forecast” – was
calculated, while I continued my presentation.
I started my
presentation and I naturally started telling why all of my forecasts would be
useless – or at least that they should not expect that I would be able to beat
the market. I of course wanted to demonstrate exactly that with my little
stunt. It was a matter of demonstrating the wisdom of the crowds –
or a simple party-version of the Efficient Market Hypothesis.
I am certainly not
weighing myself on a daily basis so I was“guestimating” my own
weight then I told the audience that my weight is 81 kilograms (fully dressed).
I usually think of my own weight as being just below 80 kg, but I was trying to
correct it for the fact I was fully dressed – and I added a bit extra because
my wife has been teasing me that I gained weight recently.
As always I was
completely confident that the “survey” result would come in close to the
“right” number. So I was bit surprised when the ”consensus forecast” for
my weight came in at 84.6 kg.
It was close enough
for me to claim that the “market” – or the crowd – was good at “forecasting”,
but I must say that I thought the “verdict” was wrong – nearly 85 kg. That is
fat. I am not fat…or am I?
So once I came back
home I immediately jumped on the scale – for once I hoped to show that
the Efficient Market Hypothesis was wrong. But the verdict was
even more cruel. 84 kg!
So the “consensus
forecast” was only half a kilo wrong and way better than my own guestimate.
So not only am I fat, but I was also beaten by the “market” in guessing my own
weight.
* The market doesn’t
lie doesn’t mean the market is always correct. A lie is an intentional
falsehood. Market manipulation would be analogous to an intentional lie so it’s
not impossible for markets to lie only difficult much of the time.
