Of Financial Markets and Unsuspecting Oxen

The concept of ‘The Wisdom of Crowds’ is at the height of its popularity now, especially since the publication of a book of the same name by James Surowiecki in 2004. It opens with an interesting anecdote about the 19th century English polymath Sir Francis Galton’s experience at a livestock fair. He noticed a wagering competition in which were invited to guess the weight of an ox on display. Eight hundred people wrote their guesses on slips of paper, including a few butchers and farmers, and many others casual guessers.

The exact mark: 1,198 pounds, was hit by just one guesser. Galton was pleasantly surprised to see the median value to be 1,207 pounds, within 0.8% of the weight measured by the judges. Even more interestingly, the mean of the guesses, or the estimation of the crowd, was 1,197 pounds, within one pound of the ox’s actual weight.

John Kay, one of Britain’s leading economists, relates the events that followed:

A few years later, the scales seemed to become less and less reliable. Repairs were expensive; but the fair organiser had a brilliant idea. Since attendees were so good at guessing the weight of an ox, it was unnecessary to repair the scales. The organiser would simply ask everyone to guess the weight, and take the average of their estimates…

The post enters more familiar territory later on.

If the farmer gave his friends any other information about the beast, that was also to be posted on the market door… Professional analysts scrutinised the contents of these regulatory announcements and advised their clients on their implications…

Some brighter analysts realised that understanding the nutrition and health of the ox was not that useful anyway. What mattered were the guesses of the bystanders…

Mathematicians from the University of Chicago developed models from which it was possible to estimate what, if there had actually been many guesses as to the weight of the animal, the average of these guesses would have been…

Can you guess what happens at the end?

(Hat tip: My friend and former colleague, Gopalkrishnan Iyer)