CHAPTER 6How to Think About the Wisdom of Crowds

“And the Oscar Goes to …”

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After taking a security analysis class taught by Paul J. at Columbia Business School in the fall of 1994, Paul S. and 21 of his classmates coaxed Paul J. into teaching an advanced investing course in the spring 1995 semester.

For several years, Paul S.’s friend, Jodi Heller, hosted an annual Academy Awards party where she had guests fill out ballots guessing who would win the Oscar in a small number of popular categories. To make the contest more fun, Jodi had everyone contribute to a betting pool and then awarded a cash prize to the most accurate forecaster.

With the 67th Academy Awards only a few weeks away, Paul S. thought it would be interesting to run a similar contest in Paul J.’s class, not as a test of forecasting abilities, but as a fun diversion. Paul S. suggested using Jodi’s contest format.

Coincidentally, Paul J. had recently read an article written by Jack Treynor1 that discussed a contest Treynor had run in his investment class at USC where he challenged his students to guess the number of beans in a jar he passed around the classroom. According to the article, Treynor ran the experiment twice. The jar had 810 beans in the first experiment. The average (mean) guess for the students was 841 and only 2 of the 46 students’ estimates were closer to the true value than the classroom average. ...

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