The Wisdom of Crowds
Currently making the rounds of all the free advertising outlets [read: fawning reviewers], a new book by theNew Yorker columnist James Suroweicki asserts that a big bunch of average people often turn out to be smarter than a small group of experts. Mobs, the author asserts, are often better predictors of the future — whether it’s stock prices or criminal culpability — than computer models and the highly trained academics who run them.
It’s an attractive, democracy-affirming theory. It’s also fundamentally wrong.
The author, who writes with elegance and wit, makes much ado about pari-mutuel racetrack odds accurately reflecting the real value of stakes horses. Over the long-term, he believes, if thousands of degenerate gamblers say Smarty Jones is a 1-5 favorite to beat eight other entrants in the Belmont Stakes, the number they’ve created by their bets is a true and fair indicator of the equine’s chances. Large crowds of ignorant people, in other words, will alchemically derive the “right” odds even though they individually know nothing special about horses. While this formulation sells books and makes the author easy to place on television shows, it demonstrates an amusing ignorance of how expert horse bettors and sports gamblers make a living.
The few people who beat the game — whether it’s the ponies or college football — find odds and prices that are fundamentally flawed, prices that offer a profitable discount to the observant shopper. In plain terms, winning sports bettors go against the public. This is not to say that the public doesn’t frequently like the same team or horse that the professional handicapper does. Sometimes they do; sometimes they don’t. It’s when they don’t — and when their mistake has altered the odds substantially — that betting against their sentiments is profitable. Seasoned gamblers (and bookmakers) know that the wise crowd Suroweicki admires overvalues favorites. Sure, everyone supposedly loves an underdog; but, when it comes to elucidating the “true chances” (as the best-selling author calls it), the mob almost always jumps on the favorite’s bandwagon — which is why betting against the favorite consistently provides more value than going with the throng of know-nothings.
Smarty Jones, as everyone knows by now, lost the Belmont Stakes to a 38-1 shot. Expert handicappers didn’t waste a penny on this race. They recognized that Smarty was clearly the class of the field, but they also knew that the public’s infatuation with him had made his price, 1-5, a terrible value. The only ones who got soaked were the inexplicably “predictive” mob that Suroweicki apotheosizes in his book.
Despite all the (flawed) studies the author cites, and despite all the anecdotal evidence he presents, when it comes to sports betting, the truth about predictions is much closer to another New Yorker writer’s theory. In The Tipping Point, the brilliant Malcolm Gladwell shows how a few astonishingly influential and catalytic people can affect the minds and hearts of many. This is why mobs of people so often seem to be on the right side of the decision: They’re listening to experts.