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The Wisdom of the Crowd in Dynamic Economies

Author

Listed:
  • Pietro Dindo

    () (Department of Economics, University Of Venice Cà Foscari)

  • Filippo Massari

    () (Australian School of Business, University of New South Wales, Sydney, Australia)

Abstract

The Wisdom of the Crowd applied to financial markets asserts that prices, an average of agents' beliefs, are more accurate than individual beliefs. However, a market selection argument implies that prices eventually reflect only the beliefs of the most accurate agent. In this paper, we show how to reconcile these alternative points of view. In markets in which agents naively learn from equilibrium prices, a dynamic Wisdom of the Crowd holds. Market participation increases agents' accuracy, and equilibrium prices are more accurate than the most accurate agent. If we replace naive learning with Bayes' rule, this positive result disappears.

Suggested Citation

  • Pietro Dindo & Filippo Massari, 2017. "The Wisdom of the Crowd in Dynamic Economies," Working Papers 2017:17, Department of Economics, University of Venice "Ca' Foscari".
  • Handle: RePEc:ven:wpaper:2017:17
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    References listed on IDEAS

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    Cited by:

    1. Daniele Giachini, 2018. "Rationality and Asset Prices under Belief Heterogeneity," LEM Papers Series 2018/07, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    2. Giulio Bottazzi & Pietro Dindo & Daniele Giachini, 2018. "Momentum and Reversal in Financial Markets with Persistent Heterogeneity," LEM Papers Series 2018/04, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.

    More about this item

    Keywords

    Wisdom of the Crowd; Heterogeneous Beliefs; Market Selection Hypothesis; Naive Learning;

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • G1 - Financial Economics - - General Financial Markets

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