CFL – You talk about the “wisdom of the crowd” in The Influential Mind – a phenomenon investors know well and frequently contend with. What’s the best way for an individual who’s trying to make an objective decision to assess the wisdom of the crowd?
TS – The wisdom of crowds holds when opinions are independent – for example, when your opinion is independent from mine, or when we’re dealing with questions that don’t inherently have biases in them already.
The classic example is the ‘guess the weight of the ox’ experiment.
This took place in 1906 and involved 800 people who were asked to look at an ox and write down on a piece of paper how much they thought it weighed. The statistician, Sir Francis Galton, analyzed their responses and found that the average guess was 1,197lb – which was surprisingly close to the ox’s actual weight of 1,198lb. (This average-weighted guess also turned out to be more accurate than the estimates of several experts who also saw the ox).
The reason this worked is that 800 people didn’t have a bias about an ox’s weight and they didn’t see what others were writing. As a result, some people overestimated and some underestimated – all to different magnitudes. But this all averaged out and the error went away. This is an example of when the wisdom of crowds can be correct.
However, in life, this isn’t the way people tend to come up with estimates or opinions. We normally arrive at them after listening to the ideas or preferences of other people – and that’s especially true online where we see so many ratings and preferences (views that are unlikely to be independent).
Also, when we’re dealing with predictions of the future – something which is obviously very important in the investment world – we have the problem that some 80% of humans have an optimism bias. So, even if we put all our predictions together and average them out, they still will be biased.
CFL – Your book is focused on how humans change each other’s minds (or struggle to do so, as the case may be). That’s obviously very relevant to the investment space. Many of our clients are on the receiving end of that dynamic – fund managers or analysts who are being pitched compelling-sounding investment opportunities on a regular basis. How can someone in that position ensure they are “listening objectively”?
TS – There is no such thing as ‘objective listening’; we are who we are and we can’t get away from listening subjectively. Our brains are constantly assessing things in the background, and then outputting feelings about whether something is good or bad. In a face-to-face meeting, that assessment could be driven by someone’s facial expressions, non-verbal cues, or because what they say somewhere reminds you of something on an unconscious level.
We get gut feelings, in other words — and sometimes these instinctive, gut feelings are wrong.
We may be influenced – let’s say when we are listening to an investment pitch – by things that are irrelevant, such as our reaction to the tone of someone’s voice.
But there are other feelings that I think we do want to take into account – eg, do you feel connected to this person? Do you instinctively trust them? These impressions could actually be important if this is someone you’re going to have to work with. Plus, if you feel connected, it probably means that you have a similar way of thinking or you share a knowledge base.
So you can see that subjectivity isn’t something we need to fight per se; we have all this information coming into us from the other person and some of it is highly likely to be useful.
Instead – and I admit it can be a tough balancing act – we need to identify and be aware of when those feelings or reactions can be damaging to whatever we’re trying to achieve.
CFL – Here, as in so many other areas, it’s crucial to be aware of what’s going on within you that could be affecting your perceptions and your behavior. We have a mantra we preach at Essentia: know thyself – this is a great example of where that principle applies.
Thank you, Tali. I’m looking forward to discussing this further with you at Behavioral Alpha – London on May 15th in London.