In 1906, statistician Francis Galton attended a livestock fair where villagers were invited to guess the weight of an ox. No villager successfully guessed the correct weight, but Galton noticed that the average of all the guesses was 1,197 pounds — the exact weight of the ox.
A famous experiment asked 56 students to guess the number of jellybeans in a jar. No single guess came close, and many guesses were wildly off the mark. But the average of their guesses came in at 871, incredibly close to the correct answer of 850.
These two examples illustrate what is known as group intelligence (also referred to as the wisdom of the crowds): the notion that groups are often better at arriving at accurate answers than even the smartest individuals in that same group.
So, what does group intelligence have to do with investing? Just about everything. The market is made up of millions of participants, each with unique knowledge and differing opinions about what stocks are really worth. These participants contribute the information they possess and express their opinions by making trades and pushing stock prices up and down.
Ultimately, the price at any given moment represents an average, or aggregation, of the opinions of thousands upon thousands of traders, professional money managers, corporate insiders, economic forecasters, financial analysts, and retail investors.
As an investor, you can choose to approach investing in one of two ways. You can attempt to outsmart, out-guess and outmaneuver this magnificent and ruthless aggregator of information we commonly refer to as “the market” or you can accept market prices for the miracle that they are: an expression of the collective wisdom, knowledge, and opinion of millions of market participants from across the globe. Then, you can focus on the aspects of investing and financial planning that will actually improve the odds of you reaching your goals.
We recommend the latter.