The Parable of the Ox
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What is the main topic discussed in this episode?
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Hello and welcome to More or Less with me, Tim Harford, following the statistical star to a numerical epiphany.
What is the Galton 'guess the weight of the ox' story that started this episode?
This week we're going to turn our attention to a parable about the financial markets, a parable about an ox. It's a story that starts with a trip that the British social scientist and statistician Francis Galton took to a country fair back in 1906. It's told by James Surowiecki, who recounts the story in his book, The Wisdom of Crowds.
As he was walking through the fair that day, he came across this contest. An ox had been placed on display, and the crowd around the ox was basically placing wagers on the weight of the ox. There was actually a huge crowd there that day, something like 800 people. And what's important about this crowd is that it was a relatively diverse crowd. While many of the people in the crowd were butchers and farmers and probably had some skill in being able to guess the weight of something like an ox, there were also a lot of people in the crowd who were not, at least on the surface, experts at all. So Galton, as he was watching this contest, it struck him that this made an interesting natural experiment.
How did Galton test the crowd's guesses and what were the results?
Galton took all the tickets and ran some statistical experiments on them. With his elitist background, he assumed the average of the guesses would be woefully wrong. But this wasn't the case.
The crowd had guessed that the ox would weigh 1,197 pounds. And when all was said and done, the ox ended up weighing 1,198 pounds. So in other words, the crowd's judgment was essentially perfect. It was actually better than any one person in the crowd. And this is a phenomenon that you can actually see over and over again. But the Galton example, I think, is a kind of perfect crystallization of this idea of the wisdom of crowds.
James Surwicky. Francis Galton's experiment at the country fair in Plymouth is famous and well-documented, but not everyone has heard the rumors of what happened next. If you're sitting comfortably, we'll begin this tale.
As the years went by, the competition continued to be a success. More and more people came to guess, and the farmer sold more of his produce, which was the original aim of the competition. But the scales became old and seemed to become less and less reliable. Repairs were expensive, much too costly for the organisers of the fair. The competition looked to be in danger, until they had a brilliant idea. Since the people who came to the fair were so good at guessing the weight of the ox, why weigh the beast at all? It wasn't necessary to repair the scales. They would simply ask everyone to guess the weight and take the average of their estimates. Newly invigorated and without the need for expensive equipment, weight-guessing competitions became all the rage.
But with popularity came high stakes. Some people tried to cheat. They even tried to get privileged information from the farmer who had bred the ox, offering presents and lavish dinners in return.
Why did the fair replace weighing with averaging guesses and what problem did that create?
The organisers became scared. If some people had an edge, others would be reluctant to enter. With few entrants, you couldn't rely on the wisdom of the crowd. The process of weight discovery would be damaged. So, strict rules were introduced to regulate the competition. The fear was calmed, and the integrity of the weight-guessing competition was upheld. But with regulation came innovation. Brighter analysts realised that understanding the nutrition and health of the ox wasn't that useful anyway. Since the beast was no longer being weighed, the key to success lay not in correctly assessing its weight, but rather in correctly assessing what other people would guess, or even what others would guess others would guess, and so on.
As the money stacked up, the professional weight-guessers and analysts congratulated themselves on how clever they were. A few lone voices tried to be heard over the roar of trading of the latest information. Some, such as old farmer Buffett, claimed that the results of this process were more and more divorced from the realities of ox-rearing.
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Chapters
6 chapters
1
What is the main topic discussed in this episode?
0:00–0:20
2
What is the Galton 'guess the weight of the ox' story that started this episode?
0:20–1:26
3
How did Galton test the crowd's guesses and what were the results?
1:26–3:28
4
Why did the fair replace weighing with averaging guesses and what problem did that create?
3:28–5:22
5
How did cheating, regulation and professional guessers change the competition?
5:22–8:08
6
What does the parable say about markets focusing on others' expectations rather than reality?
8:08–9:26