A Decade After The Lehman's Fall, Unravelling "The Wisdom Of The Crowd'"

 

Make the Wisdom Wise Again

While it's not impossible for the crowds to go 'mad', it's also not impossible for the 'wise crowds' to hold their name true. It was because in order for the crowds to have a wise decision, the crowds themselves need to have the right criteria which include diversity of opinion, independence of opinion, decentralization, and aggregation. 

In the case of 2008 financial crisis, the crowds didn't have the quality of these (especially the diversity of opinion and independence) since their opinions mostly were affected by the authority of rating agencies that their evaluations themselves relied too much on historical aspects and lacking in terms of other granular information that would have been helpful for them to determine the meaningful judgment for the assets. A

dding to this situation, like what has been explained before, investors tended to follow (imitate) other investors act in terms of investing, making them not have self-determined and differing decision (homogenous), thus disrupting the element of wise crowds. 

Besides imitation, their decisions were also affected heavily by emotion and this was indicated by impulsive act in investing on profitable derivatives even though there were already some signs surfaced in which they indicated the economy was in trouble back in 2006 when housing prices started to fall (but realtors at this time thought housing market would return to its more sustainable level).

 All in all, the crowds are indeed wise, but it needs further analysis on how to make sure that they are worth the title -- because apparently, not all crowds can be considered as wise. It is very essential for us consider the factors mentioned above in order not to repeat the same disaster that almost made the human race came to an end.

By: Sendy Jasmine Karunia Hadi | Ilmu Ekonomi 2017 | Staf Kajian Kanopi 2018