Does the “wisdom of crowds” produce alpha?
Feb 10th, 2008 | Filed under: CAPM / Alpha TheoryThe intersection of finance and technology is getting crowded. Along with information aggregation services and social investing networks, today’s the O’Reilly MoneyTech conference in New York featured celebrity financial bloggers. Barry Ritholtz (The Big Picture), Roger Ehrenberg (Information Arbitrage), Veryan Allen (Hedge Fund Blog), and even the reclusive and media-shy Finbar Taggit (Fintag.com). The event itself was moderated by blogger Paul Kedrosky (Infectious Greed) and counts among its four promotional partners, Footnoted.org and AllAboutAlpha.com.
One panel that raised a lot of interesting questions about the nature of alpha was a panel discussion on Collective Money Management. For the uninitiated “collective money management” refers to networks of investors who pool their ideas together to come up with what is hoped to be the best trades. Call it Facebook meets E*Trade I suppose. Examples include Marketocracy, PredictWallStreet, Zecco, Cake Financial, Socialpicks.com, and Covestor.
These web sites were billed in the official programme as being the antithesis of the stock market – places where people freely share ideas in the hope that they will benefit by association with the network. But while many emerging open source business models can seem counterintuitive, the idea that investors want to share their ideas isn’t realy counterintuitive or antithetical at all. In fact, it’s in perfect keeping with the spirit of the market. If an investor buys an undervalued stock, it’s actually in his best interests to tell others about his thesis since this will put upward pressure on the stock.
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[…] AllAboutAlpha asks if the wisdom of crowds produces an alpha? Too soon to tell, though his thoughts on why it isn’t really a wisdom of crowds approach seem dead on to me. […]
it would be against the investor’s self interest to share his stock pick before he actually executes the trade.
When I play poker, I am a lot more cautious about betting against the guy with lots of chips stacked up; I’m quite happy to bet against the guy who has frittered away all his starting cash.
Ditto here. Given the exceptionally low signal-to-noise ratio of these very small trades, why wouldn’t you want to take the other side? Heck, the CW is that clients of the Schwabs of the world do such awful trades that brokers are willing to pay Schwab a couple pennies per share to take the opposite side.
[…] Is “collective money management” a fad or an enduring model? (All About Alpha) […]