Listen to the Crowd

Jack Doughty

This piece won the Runner-Up Prize in the Inaugural UNIT UniMelb Writing Competition. Open to all UNIT UniMelb members, the Competition aims to give students the opportunity to develop their financial knowledge, writing and communication skills by developing a 900-word piece on any economic, financial, trading or investing topic. The Overall Winner, Runner Up and First-Year Prize winner receive publication on the UNIT UniMelb website and an interview to join the UNIT Committee as a Research Analyst. Make sure to also check out the articles of the Overall Winner and FirstYear Prize.

Consider a scenario. You are invited to take part in a competition to correctly guess the weight of a large, fully grown ox. No google allowed. How might you go about that task? Would you draw on your own limited understanding of oxen to do so? Perhaps your uncle was a butcher? Or instead, do you size the animal up and make an assessment based on intuition and gut instinct?

In 1907, Sir Frances Galton conducted this experiment on 787 fairgoers, ranging from farmers, to members of the public with no prior knowledge of the standard weight of an ox. Not one single guess registered was the correct weight of 1198 pounds, understandably, given the almost impossible difficulty of the task. However, Galton noticed something remarkable when analysing the results collected; the mean guess of the participants was almost a perfect estimate of 1197 pounds. Through further research he reasoned that this aggregate crowd was altogether wiser than the average member. Galton recognised this phenomenon as ‘the wisdom of the crowd’.

So what does this all mean, and how on earth is it relevant in financial markets? Well, the wisdom of the crowd suggests that the aggregate sum of a group of individuals’ opinions is typically more accurate than the average individual’s opinion in that group. The crowd will not always necessarily give you the ‘right’ answer, but will generally provide a more accurate reflection of reality over a long period of time than the average individual in that crowd. This process is evident in the pricing of securities in equity markets, with crowds of investors across an economy displaying their personal opinions and valuations through their investing activity. Generally speaking, a company’s share price should reflect the aggregate consensus of what constitutes a fair valuation of discounted future cash flows. The greatest evidence for the efficiency of the wisdom of the crowd is the difficulty facing investors in defeating the market for return. Rarely can an individual successfully outperform the crowd over the long term.

That said, the very existence of bubbles proves that the crowd can indeed get it wrong. The wisdom of the crowd assumes that all investors are completely rational, and are seldom ruled by emotions, but we know this not to be true. Individuals too often display a herd-like mentality in what can often become dangerous positive-feedback loops where bullish speculation can reinforce even more bullish speculation. More often than not, given a large enough sample size, the mechanism ensures random error cancels out. Issues arise, however, when error becomes systematic due to emotional trends and imitation across a population. If each member of the crowd’s individual assessment becomes influenced by their neighbour, suddenly the consensus of the crowd becomes biased.

James Surowiecki, author of ‘The Wisdom Of Crowds’, suggests that a crowd requires diversity in opinion to operate efficiently. In essence, individuals’ opinions must not be influenced by the same information sources and must be almost entirely independent. In short, investors can come to the same opinion, but they must do so on their own given access to all possible sources of information. After all, imitation amongst investors will breed systematic error in a crowd’s estimation. Despite these limitations occurring as a result of human behaviour, perhaps no better advocate for the wisdom of the crowd exists than the Strawman Index. Created by Australian investor Andrew Page, the index tracks the behaviour of individuals using his online investment community ‘Strawman’. Although the index reflects trades with virtual money, and is riddled with limitations, the Strawman portfolio has returned an astounding 37.9% p.a. since November 2017. Given that each new investor on the website receives $50,000 in virtual currency, perhaps the success of the index is due to its ability to retain impartiality between individuals. After all, no single investor has a more heavily weighted impact than another. This condition does not hold in real financial markets, where the opinion of capital-rich investors has a substantially greater impact on the valuation of a security than John Doe.

So what is the takeaway? As an investor, you can learn from the mechanism behind the wisdom of the crowd. Although it would be impossibly difficult to collate the opinion of every individual investor and use it to inform your own, Galton and Surowiecki’s findings act as a reminder to not over-emphasise any one source of information over another; whether it be the weight of an ox or a company’s share price. If nothing else, stay independent in your opinion, but listen to the crowd.


Ironmonger, J., 2017. Not Forgetting The Whale. Leicester: Thorpe. 

Surowiecki, J., 2004. The Wisdom Of Crowds: Why Many Are Smarter Than The Few And How Collective Wisdom Shapes Business, Economies, Societies, And Nations. 1st ed. Anchor. 

Yong, E., 2013. The Real Wisdom Of The Crowds. [online] Available at: <https://> [Accessed 28 July 2020].

Disclaimer: The views expressed in this article are solely that of the author’s, and do not necessarily reflect the position of UNIT nor the University of Melbourne. The advice given is general in nature and does not consider an individual’s personal financial circumstance. Transacting off this information is done so at one’s own risk, and individuals are encouraged to consult a finance professional before making investment decisions based off of this article.

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