What makes a market smart?

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The idea that markets can be smart may have lost some of its allure since the financial crisis. How could so many smart people have gotten it so wrong? Over the last week, I read James Surowiecki's The Wisdom of Crowds, and it contains a useful proviso to the idea that crowds (or markets, as this is simply one version of a crowd) are smart. Surowiecki lays out four conditions that must be met for a crowd to be smart:

...diversity of opinion (each person should have some private information, even if it's just an eccentric interpretation of the known facts), independence (people's opinions are not determined by the opinions of those around them), decentralization (people are able to specialize and draw on local knowledge), and aggregation (some mechanism exists for turning private judgments into a collective decision).

In other words, it should come as no surprise that not every market is smart. The appropriate government response to markets that aren't working properly is not to suppress or displace markets but to figure out how to meet the four conditions that Surowiecki lays out for a properly functioning market.


Ryan Hahn

Operations Officer

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