The Crowd in the Market and in the Voting Booth

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Concerning the issue of voter rationality, a commenter writes,

When applied to markets, this is known as the wisdom of crowds. Should we therefore be skeptical of that as well?

The arguments about voter irrationality say that individuals have less incentive to think carefully about their votes than about their purchases. As a result, they will act more wisely in markets than in the voting booth.

However, I do not make a “wisdom of crowds” argument for markets. Seeing the goods and services that many people consume but I don’t, as well as the goods and services that I consume that others don’t, I cannot say that I am a believer in crowd wisdom.

On the contrary, for me one of the main virtues of markets is that they allow for a diversity of preferences to be satisfied, so that I do not have to rely on the crowd’s wisdom, or lack thereof. The market offers me a spectacular array of goods and services to choose from, and the bundle that I select keeps getting better all the time. This fall, the voting booth may end up offering me a choice between Hillary Clinton and Donald Trump. Enough said.

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11 thoughts on “The Crowd in the Market and in the Voting Booth”

  2. 1) The market avoids the need to aggregate preferences.

    2) Arrows impossibility theorem is solved by adopting market assumptions–time sequential repeated bilateral choice.

  3. I think you make a very important point. Markets satisfy a very wide range of preferences (Prof Cowen’s markets in everything). In politics, you end up with only one profile being satisfied entirely. It’s as if we only had one store, Costco, and everyone had to buy everything from Costco, and the products offered were the result of voting every few years.

  4. I think that the wisdom of the crowd really only applies where the average crowd member is actually capable of evaluating the problem, like guessing the weight of a cow at the fair. Everyone will probably be wrong, but the crowd is close because people are generally able to guess in the ballpark. The wisdom of the crowd quickly ceases to be wise when the thing the crowd has to evaluate has components that most people in the crowd know nothing about.

    The argument (from what I recall) was never really that crowds are always wise, just that it’s surprising how correct the average of crowd can be when each individual is wrong.

    • Yeah, in the guess the cow the average of the error is low.

      With Presidents, it’s like defining the average of the high guesses as right, then in 4 years defining the average of the low guesses as right.

      • What an apt metaphor. This year we have a cow running for president, and she very well might win!

        I’m guessing that she weights 160 pounds.

    • You’re basically right, but I think the take home message from this isn’t “markets good/politics bad” or vice-versa, but rather we might see broad declines in the self-correcting ability of either sphere.

      Ie, political discourse and regulatory protocols that are well below the level of sophistication necessary to deal with today’s challenges and markets that are chronically bubbly and egregious consumer irrationality.

  6. While I don’t think it true in any instance and choice is limited, over longer periods it probably does approach that, if only in the sense of efficient markets that it becomes the measure of deviations, otherwise we would scoff at the idea of better than all others.

  7. Wisdom of the crowds relies on biases being neutral across large numbers of people. This allows expert opinion to shine though the noise. If biases don’t cancel themselves out there is no wisdom of the crowds.

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