Wisdom of Crowds: the Challenger Explosion

notes from Surowiecki, James. The Wisdom of Crowds. (Anchor: 2005).

Within minutes of the explosion of the space shuttle Challenger, investors began dumping stock of the 4 major participating contractors. Three firms began to creep back up after an initial decline, and one stayed down. The market had implicated a responsible party, without any external commentary or info. And the market turned out to be right — but how did that happen?

A large group of individuals…was asked a question: “How much less are these four companies worth now that the Challenger has exploded?” — that had an objectively correct answer. Those are conditions under which a crowd’s average estimate — which is, dollar-weighted, what a stock price is — is likely to be accurate. Once you aggregated all the bits of information about the explosion that all the traders in the market had in their heads that day, it added up to something close to the truth.

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