Are you wondering what a popular candy has to do with high finance? Before the academic evidence showed us otherwise, it was commonly assumed that the best way to make money in what seemed like an ungoverned market was by outwitting others at forecasting future prices and trading accordingly. Unfortunately for those still trying to operate by this outdated strategy, a simple jar of Skittles and a concept known as “group intelligence” illustrate why it’s an inherently flawed approach.
The Group Intelligence on Confectionary Counting
In his landmark book “The Wisdom of Crowds,” James Surowiecki presented and popularized the enormous body of academic insights on group intelligence. At least on questions of fact, groups are better at consistently arriving at accurate answers than even the smartest individuals in that same group. (With a caveat: each participant must be free to think independently, as is the case in our free markets. Otherwise peer pressure can taint the results.)
That’s where those Skittles come in. Or in Surowiecki’s case, it was jelly beans. He cited one experiment, in which 56 students guessed how many jelly beans were in a jar that held 850 beans. The group’s guess – i.e., the aggregated average of the students’ individual guesses – came relatively close at 871. Only one student in the class did better than that. Time and again, similar studies have demonstrated the same.
Now apply group intelligence to the market’s millions of daily trades. Each trade may be spot on or wildly off from a “fair” price, but the aggregate average incorporates all known information contributed by the intelligent, the ignorant, the lucky and the lackluster.
Thus, instead of believing the discredited notion that you can regularly outguess the market’s collective wisdom, you are better off concluding that the market is doing a better job than you can at forecasting prices. Current prices set by the market are expected to yield the closest estimate for guiding one’s next trades. Your job becomes efficiently capturing the returns that are being delivered. Our job as a financial advisor becomes helping investors do just that.
Can You Out-Count the Crowd?
But who are we to rely on others’ evidence – especially when candy is involved? We’ve decided to try the same experiment in our SageBroadview offices for some summer fun. We hope you’ll join us in our Skittles-counting contest! Drop by either our Connecticut or New Jersey offices, or send us an e-mail with your guess as to how many Skittles are in the New Jersey jar you see here. Whoever is closest will receive all the candy counted, as well as a complimentary copy of Surowiecki’s book. The contest will close on September 4th, 2014. May the sweetest-toothed person win.
Sage Serendipity: To help warm up your brain, test your Skittles prowess with this online Braingle trivia quiz.