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Do not ignore wisdom
of the crowd
By Jason Yeh ¸®a¿³
At the start of April, CPC Corp, Taiwan (CPC) increased its fuel prices by
NT$3.1 per liter.
The increase raised inflationary pressure and set off price increases across the
country, including hikes in the cost of daily necessities and dining out.
International oil prices collapsed just after this was implemented, and while
CPC has lowered fuel prices 10 weeks in a row, the prices of other commodities
will not return to what they were before the fuel price hikes.
The Consumers¡¦ Foundation recently stated that CPC¡¦s policy could be the main
culprit behind rising prices and that senior members of CPC management should
resign as a result of the mistake.
The company defended its action by saying that ¡§CPC is not an expert when it
comes to predicting fuel prices¡¨ and that ¡§predicting fuel prices is both a
science and an art,¡¨ in an attempt to absolve itself of all responsibility.
There is no doubt that the government¡¦s decision to freeze fuel prices before
the January presidential election and then raise prices in one fell swoop after
losses had been incurred went against the market mechanism, but it seems to
think two wrongs make a right.
At the time, CPC cited forecasts from HSBC, Merrill Lynch, Goldman Sachs and
JPMorgan for this year¡¦s first quarter and said fuel prices could skyrocket
because of tensions in the Middle East.
That is what it based its reports to the government on about the possible trend
of fuel prices and it was also the reason why the government decided that a
substantial price hike was necessary, rather than incremental increases.
Many people are unaware that the price predictions made by international
financial institutions are often wildly inaccurate.
Manipulation by financial speculators contributed to the fuel price bubble,
which burst around the time of the 2008 financial crisis and led to many
lawsuits.
One possible reason why their financial research reports were so inaccurate was
the highly complex and interwoven conflicting interests involved in the crisis.
In his essay The Hedgehog and the Fox, English philosopher Isaiah Berlin quotes
the ancient Greek poet Archilochus, who said: ¡§The fox knows many things, but
the hedgehog knows one big thing.¡¨
If the fox represents street smarts, the hedgehog represents book smarts, and
what is interesting about this is that the fox, which knows a little bit about
everything, is more capable of accurately predicting the future than the
hedgehog, which specializes in just one area.
In his 2005 publication titled Expert Political Judgment, University of
Pennsylvania psychology professor Philip Tetlock talks about predictions about
the future made by various experts.
In the study, he tested more than 80,000 predictions made by 284 experts on
politics, economics, history and the media. He came to the conclusion that
experts did not perform any better than dart-throwing chimps.
Why is it that experts are so bad at making predictions? Why is the fox smarter
than the hedgehog? Why are street smarts better than book smarts?
Is it because the fox is attuned to the wisdom of the crowd, and two heads are
better than one?
It is obvious that the world is a chaotic, random and ever-changing place.
There are innumerable interfering and confusing variables and the complexity of
human behavior is far greater than the atoms and molecules that exist in the
physical world.
Even the most outstanding expert lacks the brain capacity to evaluate the
complexity of such variables, not to mention the various latent conflicts of
interest that can change the outcome of any given event.
What is worse is that many of these experts indiscriminately apply their one
specialized skill to everything.
Such people have no patience with the opinions of the average person, but they
are full of confidence in their own abilities to predict outcomes. As soon as
their ideas are proven wrong, they will try and pass the buck and act as if they
never made any such prediction in the first place.
To be honest, the most accurate measure of the economy comes from the general
public. When the economy is slow and demand is weak, all speculative activity
must come to an end. Fuel prices can be propped up by hot money for a while, but
they cannot be maintained indefinitely.
When it comes to price predictions on important products that influence the
prices of daily commodities ¡X for example, fuel ¡X it would be better to trust
the behavior of the general public than to listen to what the experts say.
The question is how we should go creating an index to measure the opinions of
the general public.
Over the past two decades, the Internet has progressed rapidly and this has
given birth to mechanisms for market predictions and provided channels through
which the scattered wisdom of the crowd can come together in a systematic way.
Economists such as Kenneth Arrow, who is a Nobel laureate in economics, have
written articles that call for greater attention to be paid to the potential
value of market predictions.
The wisdom of the crowd in predicting future outcomes is an important research
tool that greatly merits further development.
The birth of platforms for predicting market outcomes has blown a hole in the
myth that experts always are right.
The results of the futures contract trading on the Exchange of Future Events run
by National Chengchi University¡¦s Center for Prediction Markets has demonstrated
the subtle power of prediction markets.
This year, National Chengchi University will be holding a summer course entitled
¡§Development and Utilization of Collective Intelligence,¡¨ and this could mark
the start of a new way of looking at prediction making.
Now that fuel prices have been cut 10 times in a row after first skyrocketing,
economic policymakers should bite the bullet, give up their reliance on
traditional prediction methods and start thinking about establishing platforms
and mechanisms for prediction.
The wisdom of the crowd represents a treasure chest that contains our collective
wisdom for predicting outcomes and political leaders cannot ignore such an
invaluable source of wisdom.
Jason Yeh is an associate professor in the Department of Finance at the
Chinese University of Hong Kong.
Translated by Drew Cameron
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