The Wisdom of Crowds, by James Surowiecki

I just read an article that was posted on my Blogger dashboard by Biz Stone. It was about the book titled "The Wisdom of Crowds", by James Surowiecki. Evidently, Surowiecki, who writes for the New Yorker according to Publisher's Weekly, argues that the wisdom of a crowd is 'wiser' than the wisdom of any individual member, if certain conditions are met. This is interesting. I have heard of the phrase "The Madness of Crowds", I think most notably in Burton Malkeil's book "A Random Walk Down Wall-Street". That book explained crowd irrationality as the basis for stock market bubbles and subsequent crashes. This new book looks interesting, and I would like to read it. Also according to Publishers Weekly, it contains introductions to behavioral economics and game theory.

On another note, as I was writing this, I was/am trying to remember the relationship between efficient markets and rationality/irrationality. Does irrational behavior make for an efficient market, or is it the other way around? I can't remember for sure. Logically, it would seem that rationality would make for an efficient market, but it seems to me that it might be the opposite. I can't remember what the efficient market hypothesis states, but I think it has something to do with the theory that the market always reflects the true value of an asset, and that nothing is ever undervalued or overvalued at any one point in time, given that everyone has equal information available to them. For this type of efficiency, I would think that investors would have to act rationally. I think Malkeil was of this school of thought, and he reasoned that there is just as good of a chance to pick a winning stock randomly as there is by picking one studied and run through models, because the stock performance in the future has not much to do with its efficient price today. Something along these lines. I remember Malkiel clearly opposed to the idea of paying large commissions and fees to so-called experts that, as a whole, have no better track record than a 'random' investor. He advocated investing in index funds, which track the entire market.

Great! I just found the following explanation of the efficient market hypothesis.

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