Lifelines

The TV show “Who Wants to Be a Millionaire?” allowed its participants various avenues of assistance.  I think they were called lifelines.  One of these permitted the contestant to call anyone he felt was qualified to assist in determining the correct answer.  In other words, he could call for an expert opinion.  Another lifeline was available from the audience attending the filming of this production.  Everybody, if asked, would vote for the correct answer, and it was up to the contestant to then decide if the majority opinion was valid.  Interestingly, statistics suggest the “expert” was right about 65% of the time.  Contrast that with the crowd which came up with the correct answer 91% of the time.

Here at Atlas we refer, from time to time, to Professor Philip Tetlock whose work illustrates that economic experts tend to be right in their predictions roughly half the time, suggesting a coin flip is just as accurate.  Consider the flap over sequestration which dominated the headlines as 2012 drew to an end.  Both the experts and conventional wisdom feared that the apparently “inevitable” result would cause our equity markets to falter while pulling the rug out from under companies comprising the defense industry.  As you know, the markets gained strength for the next six months or so while defense stocks enjoyed a substantial rally.

What happened?  This illustrates perfectly our quarrel with conventional wisdom and support for the wisdom of the crowd.  It was the latter which showed its foot print to momentum trackers.  Too often following the expert opinion and conventional wisdom can cause one, as this example illustrates, to come a cropper.      (by J R)