SWRM Labs Blog

The Wisdom and Herd Behaviors of Crowds

Jan 29, 2018 1:21:14 PM / by Robert Binning


Photo by Elijah Hiett on  Unsplash

James Surowiecki, a finance journalist at The New Yorker, wrote the fascinating book The Wisdom of Crowds in 2004. Conventional wisdom suggests that you should listen to experts — titans on Wall Street, business executives, the rich and famous. Surowiecki’s unconventional insight was that regular people often have a better collective sense of what is right. As fans of Who Wants to Be a Millionaire know, “Ask the Audience” was by far the most valuable lifeline on the show. Even if you know a good set of experts, soliciting the advice of a few hundred strangers beat “Phone a Friend” by a whopping 91% versus 65% success rate.

There are limits to this policy, of course: it only works when the crowd providing the answer are truly acting independently without information provided by others. The game show was a perfect test environment — the crowd has just a few seconds to select an answer from four options, and only the final percentages are revealed. When people influence others, the technique fails. Look at stock market boom and busts, mass riots, and other irrational crowd acts that “can similarly be explained as the outcome of a series of mutually reinforcing decisions.” [ref. Skidelsky]

The recent roller coaster of cryptocurrency prices, especially Bitcoin’s explosive rise to $20,000, followed by a 40% drop in five days, is an example of crowd behavior gone awry. Public awareness of bitcoin has grown dramatically over 2017, from a brief mention in a Super Bowl commercial in February to weekly updates on regulatory policies in Spring and Summer to the launch of three bitcoin futures listings in December 2017 after they won approval from the US Commodity Futures Trading Commission regulatory agency. Each step has built awareness of cryptocurrencies, particularly bitcoin, among the general public.

So far, the vast majority of people are aware only of bitcoin, and the most frequently asked questions are “What is it?” and “How do I buy it?” More common awareness of other coins is only just emerging now; there is almost no awareness of coins with lower market capitalizations beyond the top 10. Nonetheless, the term “ICO” has entered mainstream conversation in much the same way that “IPO” became a mainstream term in the 1990s during the dot-com boom phase.

To be sure, there are plenty of “scam ICOs,” projects that exist solely to line the pockets of the founders. One project, called a “Useless Ethereum Token,” took this observation to a satirical level, raising more than $300,000 by telling investors that the funds would only be used to buy a big-screen TV. The Long Island Ice Tea company changed its name to Long Blockchain Corp, and saw its stock value climb by 500% for a while. As Yogi Berra famously said, “It’s déjà vu all over again.” Remember Pets.com?

But beyond the crass promotions and unrealistic promises of outsized investment returns, the blockchain truly is enabling a wholly new wave of entrepreneurs to address market inefficiencies and attack monopolies and cartels. Most of these experiments will fail, just as most venture-backed startups fail, but the winners will truly change our lives. Prepare for a wild ride, similar to the birth of the internet in the early 1990s. And hold on for dear life.

References:

  1. Skidelsky, Edward. “Always ask the audience,” The Telegraph. http://www.telegraph.co.uk/culture/books/3620109/Always-ask-the-audience.html June 28, 2004. Accessed Jan 5, 2018.

Tags: ICO, Ethereum, Bitcoin, Cryptocurrency, Uncategorized, Blockchain

Robert Binning

Written by Robert Binning