TheLiveBigWay – Brackets and Bulls and the Wisdom of Ignorant Crowds
An article in the Journal of the Society for Judgment and Decision Making last year made the case that simple, name recognition-based systems for choosing winning sports teams beat more elaborate, expert-based systems. The article’s title, “The wisdom of ignorant crowds: Predicting sport outcomes by mere recognition,” is a play on a quote by 19th century essayist and historian Thomas Carlyle:
“I do not believe in the collective wisdom of individual ignorance.”
Of course, the evidence is ever before our eyes that the expert opinion of the moment is far less reliable than the collective wisdom of the (ignorant) crowds. A wonderful illustration of this reality comes from Dimensional Fund Advisors’ Wes Wellington, who recounts the litany of negative “expert” opinion offered to the public between August of last year and the present, even as we’ve seen the equity markets rising more than 30% since October. Individual assessments of the moment are both compelling in their immediacy and unreliable in their predictive power.
WHERE’S THE PARTY?
by Wes Wellington, vice-president, Dimensional Fund Advisors
The surge in stock prices around the world in the first quarter serves as a reminder that predicting market trends can be a frustrating business. Six months ago, the outlook for stock prices appeared to be fading from grim to grimmer: Congressional leaders were wrangling unsuccessfully to craft a deficit reduction plan, Standard & Poor’s had removed its AAA rating on US Treasury obligations, and Greece appeared one step away from defaulting on its debt. Yet just when many investors least expected it, stocks staged a powerful rally: From the low for the year on October 3, the S&P 500 Index rebounded 28.1% through March 30 while the Russell 2000 Index jumped 36.2%. As the news excerpts below suggest, it is worth recalling the Wall Street adage that “bull markets climb a wall of worry.”
- August 5, 2011—S&P downgrades US Treasury debt to AA+ from AAA; stocks plunge in the biggest selloff since 2008.
- September 3, 2011—Journalist: “The US economy slammed into a wall in August, failing to add new jobs for the first time in nearly a year.”
- September 5, 2011—Gold reaches a record high of $1,895 per oz. (London Fix).
- September 19, 2011—Wall Street chief equity strategist: “I don’t think we’ve seen the lows for the year by any stretch. Things have to get much worse before they get better.”
- September 23, 2011—Journalist: “The world economy once again stands on a precipice.”
- September 26, 2011—Investor: “I don’t see anything changing in the next two or three years.”
- October 1, 2011—Economist cover story: “Unless politicians act more boldly, the world economy will keep heading towards a black hole.”
- October 3, 2011—US stock prices slump to their lows of the year: 1099.23 for the S&P 500 and 609.49 for the Russell 2000 Index.
- October 13, 2011—Census Bureau reports the weakest income growth over a ten-year period since records began in 1967.
- October 20, 2011—Col. Muammar el-Qaddafi killed by Libyan rebel forces.
- November 20, 2011—Consumer goods CEO: “Consumers everywhere continue to be cautious and hesitant to spend.”
- November 21, 2011—US Congressional “supercommittee” fails to reach deficit reduction agreement.
- November 24, 2011—Market strategist: “Earnings growth is very quickly decelerating.”
- November 28, 2011—Moody’s Investors Service warns that multiple countries could default on their debt.
- November 29, 2011—AMR Corp., parent of American Airlines, files for bankruptcy.
- December 10, 2011—Detroit’s mayor predicts the city will run out of cash by April 2012.
- January 6, 2012—Gasoline prices are at the highest point ever for a new year.
- January 18, 2012—World Bank: “Developed and developing-country growth rates could fall by as much or more than in 2008–09.”
- January 18, 2012—Eastman Kodak files for bankruptcy.
- January 25, 2012—Report from Davos World Economic Forum: “Global elite fears renewed downturn.”
- February 13, 2012—Journalist: “There is still plenty that could go wrong in Europe, while U.S. economic growth remains slow and corporate earnings are looking less and less robust.”
- February 27, 2012—Money manager: “This is a business-as-usual overpriced market and you’ll get a zero return for seven years.”
- March 2, 2012—Eurostat reports that Eurozone unemployment in January reached 10.7%, the highest in fifteen years.
- March 12, 2012—Strategist: “The stock market has effectively doubled since the March ‘09 low, and we’re still in redemption territory for equity funds.”
- March 19, 2012—Journalist: “Expectations for earnings have been steadily scaled back this year, as the mood among companies has worsened.”
E.S. Browning, “Downgrade Ignites a Global Selloff,” Wall Street Journal, August 9, 2011.
Sudeep Reddy, “Job Growth Grinds to a Halt,” Wall Street Journal, September 3, 2011.
Quotation from Adam Parker, chief US equity strategist Morgan Stanley. Jonathan Cheng, “Wall Street’s Optimism Fades,” Wall Street Journal, September 19, 2011.
Chris Giles, “Financial Institutions Stare into the Abyss,” Financial Times, September 22, 2011.
Tom Lauricella, “Pivot Point: Investors Lose Faith in Stocks,” Wall Street Journal, September 26, 2011.
“Be Afraid,” Economist, October 1, 2011.
Phil Izzo, “Bleak News for Americans’ Income,” Wall Street Journal, October 13, 2011.
Kareem Fahim, “Qaddafi, Seized by Foes, Meets a Violent End,” New York Times, October 21, 2011.
Quotation from Jim Skinner, chief executive of McDonald’s. Jeff Sommer, “From the Mouths of Executives, Little Comfort,” New York Times, November 20, 2011.
Jonathan Cheng and Brendan Conway, “Panel’s Failure Sinks Stocks,” Wall Street Journal, November 21, 2011.
Quotation from David Rosenberg, chief market strategist, Gluskin Sheff & Associates. Tom Petruno, “Wall Street Gets Cautious on Earnings,” Los Angeles Times, November 24, 2011.
Brendan Conway and Steven Russolillo, “No Year-End Stock Surge in Sight,” Wall Street Journal, November 26, 2011.
Liz Alderman and Stephen Castle, “Dire Warnings Are Building on European Debt Crisis,” New York Times, November 29, 2011.
“Nowhere to Run—The Motor City Flirts with Fiscal Disaster,” Economist, December 10, 2011.
Ronald D. White, “Gas Prices Ring in 2012 at a High,” Los Angeles Times, January 6, 2012.
Chris Giles, “World Bank Warns on the Risk of Global Economic Meltdown,” Financial Times, January 18, 2012.
Chris Giles, “Pessimism Hangs in Mountain Air,” Financial Times, January 25, 2012.
Tom Lauricella and Jonathan Cheng, “Too Late to Jump Aboard?” Wall Street Journal, February 13, 2012.
Ajay Makan, “S&P 500 at Post-Crisis Peak but Investors Remain Wary,” Financial Times, February 25, 2012.
Quotation from Jeremy Grantham, chief investment strategist, GMO. Leslie P. Norton, “Not So fast: Coping with Slow Growth,” Barron’s, February 27, 2012.
Brian Blackstone, “Poor Economic Data Slam Europe,” Wall Street Journal, March 2, 2012.
Quotation from Liz Ann Sonders, chief investment strategist, Charles Schwab. Nikolaj Gammeltoft, Inyoun Hwang, and Whitney Kisling, “The Bull Turns Three. Where’s the Party?” BusinessWeek, March 12, 2012.
Ajay Makan, “Wall Street Braces For Hit to Soaring Markets,” Financial Times, March 19, 2012.