America Has A Big Passive Investing Problem | Mike Green

Somewhat accurately described a system in which each individual was formulating a hypothesis on any individual company and creating the phenomenon that we call the wisdom of crowds. But the minute you actually start deciding, well, the crowds automatically know, you start losing this. I did a Twitter experiment earlier this year in which I recreated the experiment of Francis Galton, which is the genesis of the wisdom of crowds.

So I'm just going to tell the story very quickly and then we can move on from it. Back in 1896, Francis Galton, who was a trained statistician, is observing a county fair in Oxfordshire, England, and there's a competition to see, you know, can people guess the weight of an ox carcass? And lo and behold, his assumption was there were experts there, but that their assessments were going to be polluted by the crowd. And yet the actual result from the survey that was collecting and averaging out all of the contributions that came from all of the participants came within a pound of the roughly 1,700 lb ox. Remarkable, the wisdom of crowds. So I asked people on Twitter, you can do a poll on Twitter, and I'm fortunate to have a relatively large Twitter following, what's the weight of an adult ox? And the answer actually recreated Francis Galton's experiment. The results actually centered almost directly on 1,700 lb, which is roughly the adult weight of an ox. I then asked them, how much does an adult higgledypuffus weigh? And people's immediate response is, well, what's a higgledypuffus? And I'm not answering it, right? That's part of the objective is to see what they think an adult higgledypuffus weighs. And instead what you actually get is, instead of the normal distribution that coalesces around the center, you actually get a bimodal distribution in which the two extremes are what people arrive at. And that's really part of the process, is that the wisdom of crowds actually requires an element of wisdom in each individual person. In Oxfordshire, England, rural England in 1896, people knew what an ox was. They knew it wasn't as small as a mouse. They knew it wasn't as big as a blue whale. They roughly knew what an ox was. There was some fundamental kind of knowledge that they came to the auction with.

And that has completely disappeared from today's markets.

Right? But that sounds very disorienting.

It is disorienting. That's exactly the point. Prices are meant to coordinate information. They require an element of knowledge and understanding behind them. And that's not me as an expert saying, boy, you should really pay attention to what I'm saying because I know what the right prices are. I don't know what the right prices are. But I have a directional approach that actually gives me some idea of what they're worth.

The mechanism of information exchange. Yeah.