Social Media And The Loss Of Uncorrelated Wisdom | Fast Company
It’s now a well-established fact that a group of people with diverse opinions can often make uncannily accurate decisions–smarter in many cases than any single individual could possibly manage.
Open markets are the epitome of this, because they weigh individual opinions with real money, and as a result they sometimes produce decisions that seem truly prescient. Orange-crop futures markets, for instance, do a better job predicting Florida weather than meteorologists. And just a few minutes after the 1986 explosion of the Challenger space shuttle, the stock market correctly zeroed in on Morton-Thiokol, maker of the frozen O-rings, even though it was several weeks before a team of engineers investigating the disaster figured it out. (If you find this phenomenon as fascinating as I do, then in addition to James Surowiecki’s benchmark book The Wisdom of Crowds, you might want to peruse Scott Page’s excellent academic treatment of it in The Difference.)
The key to accurate group decisions in these situations is that individual group members’ opinions must be independent of each other. If people make up their own minds, great. But if they decide what they think partly by checking out what others are thinking, then irrational cascades of opinion are likely–and in financial markets such irrational cascades are known as bubbles or crashes. It is in order to avoid erratic ups and downs, and to minimize the chances of a catastrophic loss, that a smart investor is constantly seeking out “uncorrelated” investments–that is, investments that are truly independent and unaffected by each other.