Whether it’s finding movies on Rotten Tomatoes or restaurants on Yelp, one thing is for certain: we are smarter when we think as a collective. Crowds are smarter than individuals. Decisions made by aggregating information from large groups are often better than the decisions made by any one individual. We must learn together in order to bring the entirety of our society to financial fluency.
The idea of crowdsourcing being a superior form of information gathering has been around since 1841, when Charles Mackay published Extraordinary Popular Delusions and the Madness of Crowds. In recent years, the theory has been expanded by James Surowiecki, the author of The Wisdom of Crowds.
James claims that there must be four elements to create a wise crowd capable of surpassing the judgment of its members.
1. Diversity of Opinion
So What Does This All Mean?
In order to create a smart crowd, we must rely upon the notion that individuals will arrive at eccentric interpretations of known facts. In the last Federal Reserve meeting, some of our nation’s top economists disagreed about the macroeconomic state of the current global economy. These are experts and they could not arrive at a consensus. For that reason, I think it is safe to say we will not all arrive at the same conclusion about any, one company (or industry for that matter). Some people love Snapchat; other people question their business model. This is the diversity of opinion that makes a community thrive.
Individuals must also “make independent decisions and rely upon special, local knowledge.” Clearly, any investor does exactly that. We make decisions based off of experiences. We judge companies based off of their products and evaluate business models within the context of our own understanding (decentralization). It is this very essence of identity that differentiates us; it is what makes our decisions powerful when combined together.
Finally, we get to aggregation: there must be some mechanism for turning private judgments into a collective decision. That is where Rapunzl comes in. By connecting users with each other and sharing investment strategies across the community, we allow the user to make collective decisions. We allow the user to invest alongside their friends and rely upon the power of crowds to make more informed investment decisions.
Bottom Line: We Trust Our Friends
When we read a stock opinion online, there is limited transparency. Anyone can contribute to SeekingAlpha and speak negatively about a stock. Even if an author is short a stock and solely seeking to increase the value of their position (or decrease since it’s a short position) they can publish their article to numerous sites. When a financial advisor creates an account on StockTwits, a one-line disclaimer gives them full-rights to support any position they see fit. Anyone can twist a company’s story by misconstruing facts and warping the narrative; and while this might be legal, it is also wrong. That is why we must all achieve independent financial fluency: so we can spot these issues.
Entrusting financial opinions authored by anonymous advisors tapping keys behind a computer screen is dubious. That is where investing with friends comes into play.
Sure, our friends can disappoint. Yes, our friends can sometimes go off the deep end leaving us baffled and confused. At the end of the day, we trust our friends to have our backs; we trust them because we invest ourselves in each other’s respective lives.
We may not take a friend’s advice every time they give it, but at least we know their intentions better than a financial advisor in an overpriced suit who may only view you as commission. By surrounding yourself with a greater understanding of the markets, you can continue to step closer to financial fluency. This is why we should invest friends. We’re smarter with them and we can trust them. These are the founding principles behind Rapunzl.