Market Analysis

Crowd Deification

Markets are great! But let's not deify them.

Are ants smarter than humans!? According to a recent National Geographic report, "A single ant or bee isn't smart, but their colonies are. The study of swarm intelligence is providing insights that can help humans manage complex systems, from truck routing to military robots."

Swarm Behavior
By Peter Miller, National Geographic

Sounds provocative, no? It's an interesting notion, that swarm intelligence could somehow replace the individual in the decision-making process. It's working for truck routing, after all! Many folks believe the same could be true for everything from picking the best stocks to optimal geopolitical decision-making.

Swarm thinking for society is an offshoot of the information age, and still very nascent. Just 20 years ago, people and groups were mostly islands, separated and exclusive, and communication and distance barriers too large to surmount.

But those barriers are just about eradicated. Today, information is freer and more plentiful than we can scarcely handle; we're connected and able to communicate across the globe instantaneously with vast pools of knowledge and information a few mouse clicks away.

That means today's challenge is not about getting information, it's about making that information useful. The ideas about how to do that are churning at breakneck space with some of the world's best entrepreneurs on the job.

Assignment Zero and Wired Magazine collaborated to create an interesting report on the notion of "crowdsourcing," or the idea that crowds can generate better and more accurate solutions than the individual can. There are a number of interesting articles and interviews on implications for business, markets and society at large.

Assignment Zero: Can Crowds Create Fiction, Architecture and Photography?
Jay Rosen, Wired Magazine

But we think most of these crowdsourcing folks miss the point. They say, "Oh, well if any single person or body cannot make a right decision, then maybe the crowd can." No! That's just trading one predominant decision-maker for another. Especially when it comes to stock markets, the consensus is always wrong! Whatever is widely discussed is priced in, and that means by definition it can't happen.

The idea we could take all information and opinion and turn it into a greater decision-making tool is tantamount to a gigantic leap in cognitive processing—i.e., the creation of an artificial intelligence greater than any human capacity. We're not there yet. Think about it: Wikipedia, for instance, is an incredible pool of information—but it's got no decision-making capacity. Its usefulness is determined by what kind of utility individuals get out of it.

The ant colony as smarter than a human brain is an illusion of complexity too. Ants are hard-coded with a few simple rules to follow at the micro level. That's great for making a traffic system, but that's not how stock markets or other human systems of aggregated information work at all.

When crowds come together to form markets, information is being shared to allow individuals and firms to make better decisions for themselves. When this happens, the sum is greater than the parts. Markets and sprawling systems of free information are enablers of greater efficiency to those working within it. The reason stock markets get it right more than an individual is because it's all about individuals acting in their own self-interested way—it has nothing to do with a greater decision for the whole.

What markets tells us is precisely the opposite of what rule-driven ant colonies do: The freedom to make individual, self-interested choices produces by far and away the best system of aggregate resource allocation. That's a very different thing than turning a market into a centralized Big Brother-style decision-maker.

That doesn't mean we'll never get there. Many folks believe humans can't create anything smarter than the brains we have because, well, how the heck would it be possible for a brain to create something beyond its own limitations? That's probably wrong thinking too. An obvious feature of evolution is that inferior (that is, inferior from an adaptive standpoint) organisms can give rise to superior ones. Were that not true, life could not evolve. Does that mean a great artificial intelligence is in the offing? Maybe, maybe not. It just means it's probably possible.

Greater information will lead to greater efficiency and production over time, and that's a good thing. But crowdsourcing is no messianic concept, no matter how many venture funds and geeky tech companies are started in Silicon Valley this year to try for it.

Markets are about interconnection, not about decisions. The real power is in the individual, and always has been. If you must deify anything, deify the power of individual freedom. Today's explosion of information connects us to do more and greater things. That is the true power of the marketplace.

Have a great weekend.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.