The wisdom of the crowd in dynamic economies

The wisdom of the crowd applied to financial markets asserts that prices represent a consensus belief that is more accurate than individual beliefs. However, a market selection argument implies that prices eventually reflect only the beliefs of the most accurate agent. In this paper, we show how to reconcile these alternative points of view. In markets in which agents naively learn from equilibrium prices, a dynamic wisdom of the crowd holds. Market participation increases agents' accuracy, and equilibrium prices are more accurate than the most accurate agent.

• Publication year

  2020

• Venue

  Theoretical Economics

• Publication date

  2020-03-26

• Fields of study

  Economics

• Identifiers
  DOI 10.3982/TE3924
• External record

  Open on Semantic Scholar

• Source metadata

  Semantic Scholar

• Equilibrium prices can be more accurate than the most accurate agent, reconciling the wisdom-of-the-crowd view with the market selection argument.

  Confidence 0.94

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewmexicorea (qjvnbu8xg3) review
• Market participation increases agents' accuracy.

  Confidence 0.92

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewmexicorea (qjvnbu8xg3) review
• Naive learning from equilibrium prices generates a dynamic wisdom of the crowd in which price information becomes more informative over time.

  Confidence 0.95

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewmexicorea (qjvnbu8xg3) review

• agent accuracy

  agent property

  How closely an agent's beliefs or signals match the underlying true state.

  Aliases: accuracy of agents

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewmexicorea (qjvnbu8xg3) review
• dynamic wisdom of the crowd

  theoretical concept

  A time-evolving aggregation effect in which market prices improve as agents learn and interact.

  Aliases: dynamic crowd wisdom

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewmexicorea (qjvnbu8xg3) review
• equilibrium prices

  price signal

  Market-clearing asset prices determined by the interaction of participants' demands and beliefs.

  Aliases: market prices

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewmexicorea (qjvnbu8xg3) review
• financial markets

  economic system

  Trading environments in which agents buy and sell assets and prices encode information.

  Aliases: markets

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewmexicorea (qjvnbu8xg3) review
• market participation

  market mechanism

  The act of agents taking part in the market and contributing to price formation through trading.

  Aliases: participation in markets

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewmexicorea (qjvnbu8xg3) review
• market selection argument

  economic argument

  The view that prices ultimately reflect the beliefs of the most accurate agent in the market.

  Aliases: selection argument

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewmexicorea (qjvnbu8xg3) review
• naive learning from equilibrium prices

  learning process

  A learning rule in which agents update beliefs by treating observed equilibrium prices as informative signals.

  Aliases: learning from prices

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewmexicorea (qjvnbu8xg3) review
• wisdom of the crowd

  theoretical concept

  The idea that aggregated market prices reflect a consensus belief formed across many agents.

  Aliases: crowd wisdom

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewmexicorea (qjvnbu8xg3) review

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