Wisdom of Crowds vs Herd Mentality
There are a lot of Crypto projects trying to create Prediction Markets and in almost every one of their Whitepapers you will see them reference the “Wisdom of Crowds” as resulting in correct price discovery due to the Collective Wisdom of all the market participants. I am sorry, but I am calling bullshit on that. Don’t get me wrong, I am very supportive of these projects trying to create Decentralised Betting Markets and I will be one of the earliest adopters, but this idea of the “Wisdom of Crowds” and the idea that markets can accurately predict the future I take issue with. In my not-so-humble opinion it’s an Oxymoron because in my experience crowds are stupid….
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The flip side is something else you might hear people talk about, and that is “Herd Mentality” or even “Groupthink”. You might hear people talking about investments like the stockmarket and how one person or another believes that something is a “Crowded Trade”. In other words, every man and his dog is already invested in that trade so not only is there no-one left to buy in, but it means it’s probably over-priced and highly vulnerable to a change in sentiment. In summary, you don’t really want to be invested in a “Crowded Trade”.
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If there really was “Wisdom of Crowds” then a “Crowded Trade” is where you actually would want to be. Surely the logic follows that if the crowd is there and the crowd is wise, then joining them is the wisest choice of investment? Here we get to the crux of just how idiotic this idea is. If people want to follow the herd like lemmings off a cliff, well they probably deserve what they are going to get…..and it’s not good. I will sometimes try and warn people off making stupid investments, but usually I just come across as that lone nutter and I get ignored or flamed. I am actually OK with that.
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Of course everything is relative. If you want to compare the “Wisdom of Crowds” to some talking head or establishment shill on mainstream television then, yes, those guys can make even the blind man throwing darts at a moving dartboard (also known as your average Crypto investor) look like an outright genius. After all, we have all those pump and dump schemes going on in the Crypto space which are a perfect example of the “Wisdom of Crowds” in action….oh wait, I think I’ve confused my point…..
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The truth is that there is a little known investment theory which is called Contrarianism. The Contrarian investor actively opposes the “Wisdom of Crowds” and bets against those “Crowded Trades”, often with a very high level of success. The Contrarian investor is the one you’ll see trying to keep the lid on the Blow-Off Top or you’ll find them supporting prices at the Capitulation Low – when the market has lost it’s collective mind as it so often does. To my way of thinking, Contrarians are the good guys in the market. I consider myself to be a Contrarian and I’m making a pretty decent living out of opposing the herd too. Whether it be the Stockmarket, Cryptos or Sports betting markets, the concept is the same. Identify when the crowd has herded into a position and distorted the markets such that it becomes inefficient and incorrect….and take the opposite position where the true value lies. It doesn’t always work, but it works more often than it doesn’t and that’s all you need.
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If you’re a Sports bettor then you’d know that we have the World Cup coming up soon. It is the single largest betting event in the world with extensive, liquid markets and it only happens every 4 years. I actually don’t have a clue about Soccer, but I’ll be keeping my eye out for those Crowded Trades because once you understand how markets work then the Herd Mentality is not that hard to spot. Good luck if you’re having a bet.
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The wisdom of the crowds or herd mentality... it's hard to know what it is until after the fact. Here're some data points from the contest I'm running:
The crowd thoughts on Cadiz v Zaragoza game were:
Cadiz won 2:0.
One data point means nothing, but I'm putting to the test the wisdom of the crowds theory. Will it stand up to the test, I honestly don't know.
Yes, it's a small data point but you have to start somewhere!
I think for a more accurate analysis you need to look at the market prices for the match before kick-off. If Cadiz was an underdog winner then I would be significantly impressed.
The crowd jumped on the Cadiz train and by the time the game has started the odds dropped from @2.42 to @1.95 😄
A sound piece!
The stock market taught me a few lessons over the years, ones that have faired me well since moving partially (still waiting to get above water on some trades come long term holds in stocks!) over to Crypto. I'd say the swings and heard mentality make this an easier market for the contrarian.
Nice to end on the World Cup. England are always the lay bet of the tournament, hopefully they will scrape a win in the first game and the price to appose will likely look very tasty!
Cheers!
Cheers. Yes, I also have a few underwater stocks too but it's all swings and roundabouts....and managing capital gains tax implications. I can see myself moving even more over to Crypto soon enough.
Funny that you mention England being a lay. They crashed out spectacularly in 2014 and one of my favourite places to lay is Betfair....where there is a strong parochial English presence influencing the markets. Of course I am sure I don't need to tell you about that because it sounds like you are well aware of the opportunity that can present ;)
I think i'll be slowly heading this way too, and would be very interested in a fund to put in my tax free ISA which held a bunch of Crypto - No doubt they'll be late to the party with that.
And yes, England fans walk into the bookies with their 10 pounds KNOWING it's not coming back! Once you take the emotion out of striking bets, the opportunities become clearer :)
The Contrarian investment style is probably the toughest style there is. Timing is everything. In the dotcom bubble people lost millions by betting against the tech stocks too early.
"The market can remain irrational longer than you can remain solvent " - John Maynard Keynes
It's a great quote though I am hardly a fan of Keynes. Quite the opposite.
Timing the market is near impossible, but often near enough is good enough and it's better to be too early than too late....
I don't Short stocks as a rule, nor Cryptos for that matter. The closest I would come would be options or warrants with some effective stop loss protection, but you don't need financial derivatives to be an effective Contrarian.
You clearly know nothing about "soccer" because its actually called FOOTBALL!!!!! 😂😂
Haha. Cultural differences. Where I come from Football is Rugby League and Rugby is Rugby Union. But it's fun to stir up you football hooligans from over there anyway :)
Rugby boy born and bread, been playing 30yrs now. I'm in love with the egg shaped ball!
You're a good lad! I am a long time retired now but I still have dreams about that egg shaped ball.
Pity the old body is a bit too twisted, broken and flabby these days. Though I have been tempted more than once to go back for the "Old Boys" day.
It's second team rugby for me only now. Brain still says "yes", body says "ohh hell no".
When I first heard the term crowd mentality, or using the wisdom of the crowd, I just shook my head. I knew I could make more good decisions on my own, and if I had maybe two or three good people around me, I could make even better choices. Any more people involved than that, and sometimes four can be too many, you just get endlessly bogged down in minutia or trivia.
In order for the crowd to work out, you need to have a crowd of experts. And even then you have egos and who knows what else at work. The best you can hope for is some kind of consensus, and even then you're probably going to only get that if you dumb it down or limit scope.
The herd mentality and going against it is the best advice I've ever heard for doing virtually anything. How many times has a show like American Idol or The Voice actually picked a winner that then goes on to have an amazing singing career? There aren't that many, despite weeks of exposure, and in the case of The Voice, tutoring by some of the best in the business.
Those winners aren't picked by the judges. They're picked by the country or market the show is in. So, the herd mentality and the wisdom of crowds fail over and over again. Yet those shows are among the most popular, I think mainly because you can get decent entertainment for free once or twice a week. Which ought to tell you something about the viewers, too. :)
I probably should mention that I actually like to watch The Voice, and so does my wife. I've never voted, and probably won't, because the one I'll want won't ever win. :)
Those shows are more like popularity contests to my eye. But it is another great example of the "Wisdom of Crowds" fallacy in action, thanks!
Well, everything we do are popularity contests. Voting for President, Prime Minister, Supreme Chancellor, Ruler of the Universe, whatever. We don't really get the candidates we want because they're never considered 'viable', so then it becomes about personality. So, now we've got the biggest personality (not just ego) in a long time in the White House. Like him or not like him, he's the center of attention.
I often wonder if the Nobel Peace Prize isn't also a popularity contest. If not for the people themselves, at least the fields of study or for the conclusions being made. I used to think Nobel Prizes might be based on merit, until Barack Obama got one for doing absolutely nothing.
I never looked at it that way, but yes the US has just elected a big reality TV personality. Sign of the times I guess :)
Don't get me started on the Nobel Prize stuff. That Obama award really just killed the Nobel Peace Prize for me as a credible award based on merit. I am still dirty about that and it if it's indicative of all the Nobel Prizes then it really is a very sad demise if a highly respected institution historically.
Oh, I would say it happens more than either of us would like, but I would also say there's still some merit to it. But a peace prize is about as political as it gets, don't you think? One man's peacemaker is bound to be someone else's warmonger or sellout or something. My issue is that a lot of science, if not all of it now, is agenda driven in one way or another, so instead of being based on the scientific method, it's based on the policies being driven by whatever government is willing to foot the bills. Or, I suppose you could add in global corporations, since they do a lot of R & D and tend to get political about it, too.
Interesting article, thanks for sharing. I've smashed the upvote button for you!
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