Recently my learned friend Dr. Ananth Nageswaran raised a question in the MINT whether the Indian Sensex trading at an all time high is product of global liquidity or is it a reflection of India’s growth.
The site has some problems and is still in beta and hence I quote below some salient points:
“To reiterate, the reason central bankers hesitate to intervene when asset prices keep climbing is that they find it unreasonable that a few men could overrule the judgement of hundreds and thousands of market participants. Perhaps, the real reason is that it is also politically unpopular to throw sands under the wheels of asset markets. In any case, it is hard to say whether asset prices were in a bubble or were discounting rational optimism (an oxymoron?) until after the fact. Precisely such a debate is under way in India right now. The all-important question is whether the Sensex, at over 14,000 points, is a product of global liquidity or is a rational reflection of the current and prospective high-economic growth in the country.”
He further adds: “In a way, acknowledging the final authority of the market is equivalent to acknowledging the existence of a power that dominates and consummates human endeavours. That is the first step towards spirituality. Spirituality starts with the admission by our egos that our opinions are not the final word on the subject—whether it is in the world of investment or otherwise”.
Having read the book The Wisdom of crowds by James Suroweiecki, I am curious to understand its application in financial markets. The book’s primary tenet is that a crowd defined as a group of people(investors) will typically be smarter and make better predictions than any expert. In the technology area there are many examples. It also talks about how the collective opinion of the punters in the race course picks up the winning horse more number of times than the experts and why more than 90% of fund managers perform worse than the overall market.
Now societies as a whole and Indian society more so, have traditionally placed a significant premium on the opinion of experts or gurus. Since we never had the Internet till recently, this was justifiably so. Now, with the advent of Internet, and more importantly the rise of social networking, and a very diverse group of people participating, the wisdom of the crowds is becoming a reality and an opinion which in many cases seem to run counter to the expert’s view . So currently in many domains there’s a very interesting debate about whether the experts view / prediction is likely to prevail / proven right or the view of the crowd will prevail.
I would like to hear views on how the expert’s view and the wisdom of the crowds as defined by James apply to emerging markets. Are they more pronounced in emerging markets than well developed markets?
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