Note: I wrote this on my earlier blog hosted as http://parallelspirals.blogspot.com/. I recovered the text from the WayBack Machine. This post appeared on February 28, 2008 as per the timestamp. I’m trying to collect here again all my old writings spread on various blogs.
I picked up James Surowiecki‘s book The Wisdom of Crowds from my library today. It’s byline reads: Why the many are smarter than the few? It’s basically a management book and the only reason I picked it up was to get a management eye view of why this happens. I’ve seen this work in some cases within SEDS and in some cases even in my class, so I really am biased towards the view that crowds can sometimes make better decisions than the experts of the field given a particular situation.
The book makes a reference to an event that occurred immediately after the Challenger disaster on January 28, 1986. The launch was televised, so the news of the incident did spread quite quickly. One of the people who got this news was the Dow Jones, a stock market. Dow Jones did not stop trading for mourning but continued trading.
Four companies were involved in the Challenger programme: Rockwell International (built the shuttle and the main engine), Lockheed (ground support), Martin Marietta (external fuel tanks) and Morton Thiokol (solid fuel booster rocket). These shares started declining in the market 21 minutes after the disaster. Stocks of the companies involved fell almost immediately. By the end of the day, the stocks of Morton Thiokol fell by 12% while the other companies recovered and had fallen only by about 3%.
Six months after the explosion, the Presidential Commission on the Challenger held Morton Thiokol liable for the disaster due to the failure of the O-Ring which became less resilient in cold weather and allowed the gases to leak out.
Surowiecki argues that the collective wisdom of the market crowd had squarely blamed Morton Thiokol for the disaster within a day which was later proved as the correct by the Presidential Commission. Surowiecki points out that a study by finance professors Michael Maloney and J. Harold Mulherin into the stock market reaction discovered no foul play or backstage manipulation leading to the steeper fall of the Thiokol stocks. Surowiecki states that what happened was that a large crowd was asked the question – How much less worth are these four companies worth now that the Challenger has exploded? and the market responded with an objectively correct answer. Thus, Surowiecki says that the average answer of the crowd will be at least as good as or even better than the answer of the smartest member.
Stock Markets and space? Whoodathunkit? I wonder if similar studies have been made after the Columbia disaster and the Apollo-11 landings.