Vishet av folkmassan och Bullwhipen verkställer
December 13, 2007 by Raj Sheelvant
Igen får mycket smart aktieägare (både stort och litet) bet av krediteraknastrandet av 2007. In fact involvement of larger number of people in the real estate market has led to soaring of property value, which in turn led to the sub prime mess. Banks, Mortgage industries and other financial institutions who deal with risk every day got side tracked and surprise – surprise they did not anticipate the coming sub prime and liquidity crisis. From borrowers to lenders, everyone globally is seeing their investments getting decimated.
As seen above, the amplification is strongly correlated with the number of people involved. As more people get plugged directly or indirectly in the global economy, we will see some wild gyrations. Wisdom of the crowd acts in a harmful way doesn’t it. Why is that? Why, when the number of people involved increases, our collective ability to detect anomalies and ‘bubbles’ diminishes? The answer lies in what Warren Buffett calls ‘Institutional Imperative’ (see my blog Traditional Manager and the curse of Institutional Imperative). Buffett describes the ‘Institutional Imperative’ as that need for people to act and do like their peers no matter how irrational it may seem.
This institutional imperative ‘mixed with’ the wisdom of the crowd is the sure recipe for creating an enhanced Bullwhip effect. We will see more volatility in the market as the number of people involved increases. The hype of crowd sourcing and ‘peer’ production needs to be dealt with carefully. Though there are some great applications that can take advantage of user created content, I think there is also an elevated risk of going in a wrong path for a long time without being corrected because of the ‘wisdom’ of the crowd.
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