Betting Against the Crowd

Every January, there are a lot of people making predictions about what will happen in the New Year. Instead of making more of them, it may be helpful to consider the words of one oil man, "This business is the only business I know where you can be sure that every decision you make will be wrong."

Instead of making predictions, it can be interesting to identify what not to bet on.

For example, every year there are "hot new markets". Looking at the history of such new markets shows that almost every company in those markets will fail.

We are seeing examples of "sure bets" failing. In Europe, when they established the Euro Zone, many people saw the opportunities in some countries and saw them as "sure bets". If the Irish could have the same economics as Germany and keep their prior style, the investors would have a boom. Well, they did and now the bill is coming due.

Another area where investor see sure bets is indicated by demographics. This is the year that the first "Baby Boomers" hit 65 and it is assumed that they will start retiring. Many people will see that and bet on a company that caters to retirees. The trouble is that, on average, companies that cater to the retirees will do well; there will be a lot of companies that attempt to do so and fail.

It is important to not bet against demographics either. Yes, the Boomers will start retiring. However, many of them do not have the savings to be able to retire in the manner that they expect to. Thus, we will see both Boomers with the ability to have a life of ease in retirement and those who will be in poverty.

In legal circles, we see the same mental process at work. Lawmakers on all sides assume that they can predict how a new law will work. Yet, people will act different from expected. (Thus, we have the "Law of Unintended Consequences.)

Because of both the legal environment and the demographic changes, we will see changes in how companies operate. When we look at Northern Italy, we find many small companies. The reason is that the laws have exemptions for smaller companies. In this country, many of the new laws have exemptions for small businesses. As the laws in the US add more costs and regulations, we may see a similar migration to such smaller companies who work together.

So, as always, when we think we have a sure bet, there can be ways that the bet fails.

Why the Wisdom of Crowds fails.

In this newsletter, we have talked about the "wisdom of crowds" process before. Historically, many people distrust such process. It turns out that there are good reasons to distrust the process. Part of the reason for distrusting that process is that many people do not properly select their "crowd".

There are several ways that you can defeat the process and wind up with results that are either skewed or even wrong.

One way is to select the "crowd" with too low of an incentive for being part of the crowd. In a recent test, a group of people were selected with a very low incentive to be part of the group. Then, they were tested on some simple tests. (The researchers were trying to find a population of people for a second set of tests to compare against a software program.) Out of over 4,600 people, only 79 passed the first set of simple tests.

Another way to improperly select the "crowd" is to get volunteers from a known skewed group. The way that the "wisdom of crowds" works is to have a wide range of backgrounds and viewpoints. Thus, when the "crowd" is taken only from upper management of one company, the needed other viewpoints are missing and the results are biased.

The challenge with this process is to get enough wide ranging views so that unusual ideas can be heard and the normal "group think" that companies get into can be overcome.

Like everything else, when we try to get intelligence on the cheap, we wind up with less intelligent results.

One Sure bet - Risks

One bet that is sure is that someone will fail to have proper back up of their data. Real Estate transactions in New Orleans Parish have been slowed to a crawl because of a crash of the one computer in the parish clerk's office that had the data. People have had to go back to manual searches.

(You do have your cell phone data backed up, don't you?)