Dear Ms. Kusama, how many dots did you paint? The wisdom of the crowds and market pricing
Endowus Insights

Dear Ms. Kusama, how many dots did you paint? The wisdom of the crowds and market pricing

Oct 2021
Apr 2018

Yes - technically they are not dots, they are the negative space of her compulsive brush strokes in her famous Infinity Net series, but that is not why we are talking about Kusama today.

If you've ever played the "guess the jelly beans in a jar game", you can see the wisdom of crowds in action. Most guesses are way off, but what is interesting is that when you have a large enough group, the average answer tends to be highly accurate - even more accurate than the best (or luckiest) guesser in the group.

The results from one group of participants:

Range of Answers: 409 to 5,365

Average: 1,653

Actual: 1,670

Collectively, we are smarter than any individual.

Markets are a crowd. Every time we buy or sell, we are expressing our view on what a security is worth, and the collective decisions (whether right, wrong or just plain foolish) set the price. Individually, we may be way off in determining the 'right' price, but collectively, the markets weed out the outliers and aggregate the diverse choices of all participants into the market price.

Markets, though manmade, are a living and breathing organism, efficiently consuming and processing data, resulting in constant price discovery. They beautifully reflect fact, opinion, weather, time, and emotion to the cent.

We are not saying stock prices (or Bitcoin prices) are not perfectly valued all the time: we have seen periods of wild price swings in reaction to investor fear or greed, where fundamentals are thrown out of the window. However, over the long-term, we believe that markets are efficient, and the crowds discover a price that is fair, with everyone's voice heard.

You don't have to outguess the market to be be a successful investor - it is already smarter than any of us individually. Markets have historically rewarded long-term investors - harness the wisdom of the crowds and let the markets work for you.

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