http://www.micromotives.com/2006/08/exploiting-the-herd-case-study-two/ The Science & Art of Decision Making Wed, 07 Jan 2009 01:59:54 +0000 http://wordpress.org/?v=2.6 http://www.micromotives.com/2006/08/exploiting-the-herd-case-study-two/#comment-161 Interdisciplinary Perspectives On Risk — Micromotives Mon, 28 Aug 2006 14:21:01 +0000 http://www.micromotives.com/2006/08/exploiting-the-herd-case-study-two/#comment-161 [...] Mauboussin then makes the distinction between endogenous risk, which emerges from a complex system itself, and exogenous risk, which is forced on a system from outside. System dynamics that emerge endogenously, without being precipitated by any outside event, are behind many of the interesting phenomena we see in the markets and society at large today. While endogenous risk is just beginning to be understood, it’s a critical area of research. We’ve looked at some examples of endogenous system dynamics earlier this week with Exploiting the Herd, A Case Study and Exploiting the Herd: Case Study Two. Mauboussin presents some of the common frameworks used to understand endogenous risk: The first framework is the wisdom of crowds, which writer Jim Surowiecki laid out well a couple of years ago in his book of the same title. The basic idea is simple and somewhat counterintuitive: if you get a diverse group of people together to solve a problem, the group’s answer will typically be better than that of any individual, even an expert. The wisdom of crowds is a more common way of describing a type of complex adaptive system–the heart of the Santa Fe Institute’s work–and is an apt description of the stock market. [...] [...] Mauboussin then makes the distinction between endogenous risk, which emerges from a complex system itself, and exogenous risk, which is forced on a system from outside. System dynamics that emerge endogenously, without being precipitated by any outside event, are behind many of the interesting phenomena we see in the markets and society at large today. While endogenous risk is just beginning to be understood, it’s a critical area of research. We’ve looked at some examples of endogenous system dynamics earlier this week with Exploiting the Herd, A Case Study and Exploiting the Herd: Case Study Two. Mauboussin presents some of the common frameworks used to understand endogenous risk: The first framework is the wisdom of crowds, which writer Jim Surowiecki laid out well a couple of years ago in his book of the same title. The basic idea is simple and somewhat counterintuitive: if you get a diverse group of people together to solve a problem, the group’s answer will typically be better than that of any individual, even an expert. The wisdom of crowds is a more common way of describing a type of complex adaptive system–the heart of the Santa Fe Institute’s work–and is an apt description of the stock market. [...]

]]>