Friday, 3 April 2009

When The Crowds Are Not So Wise

James Surowiecki, the author of "The Wisdom of Crowds" came up with some interesting points in his article How the bandwagon wrecked the wisdom of market crowds in Tuesday Guardian when talking about the credit crunch and why the wisdom of crowds didn't kick in.

  • The link between pay and non long term performance was not existent - people were paid on the instant short return results
  • The long term consequences of failure did not register in people minds
  • People outsourced responsibility to others such as ratings agencies rather than check into it themselves

The fact that Bernie Madoff 'ran' a $50,000,000,000 fund that barely traded any equities over a 20 year period would suggest that there is some truth in this.