The Stock Market, Individual Ignorance, and Collective Knowledge

The best and most vivid illustration of the individual predictive incompetence of human beings is provided by the stock market. One might have thought that, given a reasonable amount of specialized knowledge, analytical skills, and business experience, one should be able to consistently discover new Apples, Netflixes, and Teslas in one's area of expertise before the general public jumps on board, thus consistenly beating the general market by a fair margin. After all, looking back on various charts, it seems that an awful lot of money is being consistently left on the table.

And yet, it turns out that there are very few individuals in the whole world who were able to consistently beat the market indices over the long run, and even they managed to beat them by just a few percentage points. So, rather than calling them predictive geniuses, we might as well call them predictive moderates and the rest of the world predictive idiots. There are hardly any more sobering facts to bear in mind whenever any self-proclaimed "expert" or "policymaker" declares what the economy, or even a highly specific niche sector of the economy, is about to do.

At the same time, the stock market also provides the best and most vivid illustration of the collective predictive competence of humankind, since the majority of financial assets are priced just about right most of the time, making major asset bubbles that are not triggered by coercive, political manipulations of market signals a very rare phenomenon. In other words, the stock market is the most vivid expression of humans' collective knowledge, while politics is the most vivid expression of their collective ignorance. This is the main thing that should be borne in mind whenever one hears the tired nostrum about "public policy" needed to curb "animal spirits".