Thursday, June 28, 2007

Wisdom of outliers helps crowds, or Average > Median

Arnold Kling, on Edger Capen (of the Winner's Curse):
His main theme is that people under-estimate uncertainty. If someone says, "the chance of X falling between A and B is 90 percent," the true probability is likely to be 30 percent. He likes to do experiments where he puts a large number of beads in a jar and asks people to guess the number of beads. One point he makes is that the "wisdom of crowds" result (that the average estimate tends to be pretty good) often depends on keeping outlier estimates in the sample. It is the extreme contrarianism of one person in the crowd that keeps the crowd's estimate from going off track. I wonder if anyone has compared median estimates with mean estimates in "wisdom of crowd" studies.
The market mechanism can actually prevent the outliers from contributing, as they are buried way back deep in the order book. Any ideas on how to mitigate that?

No comments:

Post a Comment