Economics- Wisdom of the Crowd | Assignment Desk

1. Economics- Wisdom of the Crowd Investigating financial markets where bubbles and crashes influence profits and how following the crowd can be beneficial as well as foolish

2. INTRODUCTION • Wisdom of crowd becomes assets or liability in the investment world. • It is not only true for bubble times but also for crash times. • The current research is based on analyzing the financial market where bubbles and crashes in stocks affect profit of investors (Kozinets, Hemetsberger and Schau, 2008). Cont….

3. Research will identify weather wisdom of crowd is beneficial in bubble and crash time or not. • For attaining research objectives study will determine different factors which may affect the wisdom of crowd. • Impact on wisdom of crowd will directly affect the investor’s’ decision which will be describing in the following slides.

4. Get the Assignment Help in UK From the Professional Writers Connect Us on:-https://www.assignmentdesk.co.uk/ Offical Email Id:- help@assignmentdesk.co.uk Call us Now:- +44 203 8681 670 Our experts are 24/7 avaible for your support. We help students in any kind of academic wiritng task @nominal prices. Why hire others when Assignment Desk is here. Call us now and SAVE £ 40.

5. Wisdom of Crowd • Wisdom of crowd means collective opinion of a group of entities about a particular subject and issue. • “Many are smarter than few” and • “Collective opinion is better than perception of a single individual for a specific subject matter” (Marbach and et.al, 2012). • Wisdom of crowd shapes business, economies, communities and countries. Cont….

6. It plays important role in financial markets. • Crowd word refers to the group of people who may be associated with different disciplines, departments or backgrounds. • They may be an assembly of researchers, corporate, public or experts in some specific field. • Wisdom of crowd plays very significant role in financial market (Lorenz and et.al, 2011).

7. Types of Crowd Wisdom Crowd wisdom can be defined as a process which focuses on collective opinion of a different groups rather than an individuals to resolve a problem and get solution of a question (Kittur and Kraut, 2008). There are three types of crowd wisdom: • Cognition • Coordination • Cooperation

8. Get the Assignment Help in UK From the Professional Writers Connect Us on:-https://www.assignmentdesk.co.uk/ Offical Email Id:- help@assignmentdesk.co.uk Call us Now:- +44 203 8681 670 Our experts are 24/7 avaible for your support. We help students in any kind of academic wiritng task @nominal prices. Why hire others when Assignment Desk is here. Call us now and SAVE £ 40.

9. 1. Cognition It is one of the fastest and effective crowd wisdom for analyzing a single situation or a problem. Cluster of experts deliberately participate in this process to give their opinions (Gaissmaier and Marewski, 2011). Opinions of crowd is based on their own thinking and information processing so, political factors of the current market cannot influence their perception about any subject.

10. 2. Coordination It focuses on the coordination of behavior between individuals of group in which everyone is trying to do the same. It is a significant type of group behavior which includes appropriate analysis of social behavior for developing a strong opinion about a particular subject matter. Along with this, it focuses on the maximum utilization of the rational decisions for improving the collective opinion about problem or issue (Golub and Jackson, 2010). This type of crowd wisdom works with individuals who share common culture and makes a direct impact on common behavior and opinions.

11. 3. Cooperation It a type of crowd wisdom in which group of people can form networks of trust without a central system controlling their behavior and their compliance (Chen, De, Hu and Hwang, 2014).

12. Bubble and Crashes in Financial Market

13. Bubble • Market bubble is a significant increase in the total value of a financial market. • Bubble occurs if inventors increases their demand for a particular stock beyond the actual performance of the underlying company. • Due to the market bubble price of particular stock raise (Ashby and Yampolskiy, 2011).

14. Crashes • Market crash is a substantial drop in the value of a market. • At this time major investors think that market will give them massive loss. • So, in this situation investors try to sale their shares in less price for minimizing their future loss (McFadden and VenkerWeidenbenner, 2010). • These types of panic selling decline the value of market and create a situation of eventually market crashes and affects each and every individual of economy.

15. Conditions for the Crowd to be Wise Yampolskiy and El-Barkouky, 2011 has concluded that “for analyzing financial market situations all crowd are not wise” (Yampolskiy and El-Barkouky, 2011). There are some elements which can help in developing a wise crowd. These criteria also help in making difference between wise and irrational crowds for stock market bubbles and crashes. These are as follows: • Diversity of opinions • Independence • Decentralization • Aggregation

16. Diversity of Opinions: For developing a wise crowd every individual of group should have their own opinion and private information about the financial market situation. Individuals can make their opinions by conducting interpretation of the known facts and figures (Murr, 2011). So, diversity of knowledge and opinion of every individual will help in predicting bubbles and crashes of financial market. Independence: Individual’s opinion should not influence on the basis of the opinions of the other members of the group. Independent opinion of individuals help in making a wise crowd. Therefore, in the financial market if every individual will have their own opinion about value of stock market than it will help in making wisdom of crowd for financial bubbles and crashes (Mannes, 2009).

17. Decentralization: Nam, 2010 has concluded that “People are able to concentrate and draw on local knowledge” (Nam, 2010). It helps in motivating individuals to make important decisions on the basis of the local knowledge. Aggregation: As per this element, collective opinion provides appropriate solution of a problem as compare to the view of the smartest person (Zesch and Gurevych, 2010).

18. Get the Assignment Help in UK From the Professional Writers Connect Us on:-https://www.assignmentdesk.co.uk/ Offical Email Id:- help@assignmentdesk.co.uk Call us Now:- +44 203 8681 670 Our experts are 24/7 avaible for your support. We help students in any kind of academic wiritng task @nominal prices. Why hire others when Assignment Desk is here. Call us now and SAVE £ 40.

19. Comparing the Crowd with an Individual Expert • Crowd wisdom always plays important role in attracting people towards the financial market. • Sometimes flaws in collective opinion may result in ineffective results as compare to the opinion of individual experts (Kozinets, Hemetsberger and Schau, 2008). • Most of the organizations are widely trusted on knowledge and skills of individuals and considered them as a quick and reliable source of information.

20. Literature review has reflected that level of knowledge of individuals is very limited as compare to the group of expert. Because in a group every individual may have different knowledge and skills which help in developing a strong opinion for every situation (Marbach and et.al, 2012). • Btu, on the other hand, if any individual who is expertise in a specific field than their performance may affect in distinct situations and tasks. • Results of literature has shown that sum of average opinions is more reliable than choosing a single expert. • But, still there are some factors which can influence the collective opinion of crowd and leads towards the failure of crowd intelligence (McFadden and VenkerWeidenbenner, 2010).

21. Factors Resulting in Failure of Crowd Intelligence Number of elements can negatively affect the crowd intelligence. These include: • Homogeneity • Centralization • Division • Limitation • Emotionality

22. Investigating of Financial Market Where Bubbles and Crashes Influence Profits

23. Impact of Bubbles • Sudden boom in market economy scare each and every one and the healing process if very long and painful for investors. • Therefore, at the time of market bubble investors are started to buy large number of share at higher value because they expect raise in price (Gaissmaier and Marewski, 2011). • At the time of market bubble value of stock is predicted by investors very high as compare to the actual performance of the core company. • Therefore, economic bubble can increase the demand of the shares. Cont….

24. But at the time of economic boom individuals enjoy incredible job offers, hike in salary and wages and increase number of investment during market bubble. Overall, it has a positive influence towards the standard of living of every individual (Nam, 2010). • But, sometimes expectations of individuals may negatively affect if future performance of particular shares becomes very low. It results the economic downturn and reduction in purchasing power of every individual. • So, every individual needs to focus on appropriate analysis of financial markets and its fluctuations (Chen, De, Hu and Hwang, 2014).

25. Impact of Crashes • Stock market crash is sudden and dramatic decline in price of stock market which leads significant loss of investors. • It increases the situation of panic selling of stocks. • At this time investors think that price of shares may decline in future which can increase the future loss of investors. And due to this rational they start to sale their shares at very low price which increase their investment loss (Ashby and Yampolskiy, 2011). • Crashes lead financial and economic crisis, recession, depression. • At the time of crash, investor sales their shares at any price so it has negative impact on share price or stock value of underlying company (Walter and Back, 2010).

26. Get the Assignment Help in UK From the Professional Writers Connect Us on:-https://www.assignmentdesk.co.uk/ Offical Email Id:- help@assignmentdesk.co.uk Call us Now:- +44 203 8681 670 Our experts are 24/7 avaible for your support. We help students in any kind of academic wiritng task @nominal prices. Why hire others when Assignment Desk is here. Call us now and SAVE £ 40.

27. Wisdom of Crowd can be Beneficial or Foolish at the Time of Bubbles and Crashes

28. Yampolskiy and El-Barkouky, 2011 has concluded that “wisdom of crowds becomes a liability in the investment world” (Yampolskiy and El-Barkouky, 2011). This statement if true not only for bubble and crashes times but also during ordinary times. • At the time of market bubbles wisdom of crowd is in the favor of high investment. • But, extensive research has reflected that wisdom of heading goes in opposite direction. So, it’s a good sign to get out early and avoid running further with the crowds. • Economic position of 1929 and 2001 supports the above statements because at that time every one was expecting market bubble but crash in stock markets underscores the wisdom of crowd (Kittur and Kraut, 2008).

29. Wisdom of crowd is generally based on the past performance but most of the financial research has reflected that “Past performance is no guarantee of future performance”. • Social influence can degrade the collective opinion. • Wisdom of crowd is beneficial or not is depend on the intelligence of crowd and presence of attributes which help in developing a wise opinion of crowd (Zesch and Gurevych, 2010). • At the time of bubbles wisdom of crowd • Wisdom of crowd is not beneficial for every situation because inaccurate collective opinion about bubbles and crashes can creates a situation of eventually financial losses of investors. • In contrast, Delphi technique is one of the important model which helps in predicting the future fluctuation in the financial market (Murr, 2011). If, wisdom of crowd in based on this model than it helps investors in preventing future loss and getting opportunity to increase their profit.

30. Conclusion The current research has concluded wisdom of crowd plays very important role in financial market because it can create an eventually bubbles and crashes. Sometimes, collective opinion can decline the profits of investors and on the other hand wisdom of crowd can reduce the total loss of individuals. Including this, study has also found that, Diversity of opinions, Independence, Decentralization and Aggregation are considered as important element which play significant role in developing a wise crowd. But on the other hand, according to literature Homogeneity, Centralization, Division, Limitation and Emotionality are major factors which can harm the wisdom of crowd. So, at the time of decision making investors needs to focus on all these factors because these factors will help in taking appropriate decisions for investing amount in shares.

31. References • Ashby, L. H. and Yampolskiy, R. V., 2011. Genetic algorithm and Wisdom of Artificial Crowds algorithm applied to Light up. In IEEE Intelligent Systems. pp. 27-32. • Chen, H., De, P., Hu, Y. J. and Hwang, B. H., 2014. Wisdom of crowds: The value of stock opinions transmitted through social media. Review of Financial Studies. 27(5). pp. 1367-1403. • Gaissmaier, W. and Marewski, J. N., 2011. Forecasting elections with mere recognition from small, lousy samples: A comparison of collective recognition, wisdom of crowds, and representative polls. Judgment and Decision Making. 6(1). pp. 73-88. • Golub, B. and Jackson, M. O., 2010. Naive learning in social networks and the wisdom of crowds. American Economic Journal: Microeconomics. Pp. 112-149. • Kittur, A. and Kraut, R. E., 2008. Harnessing the wisdom of crowds in wikipedia: quality through coordination. InProceedings of the 2008 ACM conference on Computer supported cooperative work. pp. 37-46. • Kozinets, R. V., Hemetsberger, A. and Schau, H. J., 2008. The wisdom of consumer crowds collective innovation in the age of networked marketing. Journal of Macromarketing. 28(4). pp. 339-354. • Leslie, M. B., 2010. The Wisdom of Crowds? Groupthink and Nonprofit Governance. Florida Law Review. (62). pp. 1179. • Lorenz, J., and et.al., 2011. How social influence can undermine the wisdom of crowd effect. Proceedings of the National Academy of Sciences. 108(22). pp. 9020-9025. • Mannes, A. E., 2009. Are we wise about the wisdom of crowds? The use of group judgments in belief revision. Management Science. 55(8). pp. 1267-1279.

32. Get the Assignment Help in UK From the Professional Writers Connect Us on:-https://www.assignmentdesk.co.uk/ Offical Email Id:- help@assignmentdesk.co.uk Call us Now:- +44 203 8681 670 Our experts are 24/7 avaible for your support. We help students in any kind of academic wiritng task @nominal prices. Why hire others when Assignment Desk is here. Call us now and SAVE £ 40.

33. Thank You Thanks for Watching. Have a Nice Day