Web Biz

    The other day it struck me that the theory of web 2.0 and that of capital markets share a commonality: embracing the power of collective intelligence.  Popular web 2.0 sites like Flickr, wikipedia and del.icio.us have experienced enormous success with this approach, as have social networking sites like myspace and facebook.  Whether it is a personal story or photo, or the constant update to a huge collection of information and knowledge on every subject area, the success achieved by these web sites is due in large part, not to the developers or content managers, but to the many users and visitors to these sites.  It is amazing how the web has been able to capture the collective intelligence of the masses, in order to efficiently hopefully collect and archive data, information, and knowledge on a wide breadth of subject areas in the form of words, images, multimedia and more.  What I find to be impressive is that what is being called the next generation of the web, is not a new idea or concept.  In fact, capital markets around the world have relied upon this same premise for hundreds of years.

    Financial markets are heavily impacted by the effects of supply and demand but also the impact of investors’ and analysts’ personal rational and emotions.  This governing principle is taught in business schools around the country, referred to as the ‘efficient market theory’.  And of course, how could I write this article without drawing from the collective intelligence of wikipedia; so here is what the authors of wikipedia define as the efficient market hypothesis:

In finance, the efficient market hypothesis (EMH) asserts that financial markets are "efficient", or that prices on traded assets, e.g. stocks, bonds, or property, already reflect all known information and therefore are unbiased in the sense that they reflect the collective beliefs of all investors about future prospects. 

    This theory is highly debated in all levels of finance and economics, but one thing is clear: the market is not efficient.  This is exemplified by the personal monetary motivations of corporate executives and analysts.  Perhaps one of the most successful investors, Warren Buffet, said it best:

"The professors who taught Efficient Market Theory said that someone throwing darts at the stock tables could select stock portfolio having prospects just as good as one selected by the brightest, most hard-working securities analyst. Observing correctly that the market was frequently efficient, they went on to conclude incorrectly that it was always efficient."

    In conclusion, the idea behind all of this is that collectively, our intelligence far exceeds any individual’s personal intelligence or knowledge.  This principal is not only the driving force behind much of Google’s approaches and other web 2.0 companies’, but also that of the financial markets which seek to ensure the most efficient use of resources for the benefit of the stockholders, stakeholders and economy.  It is amazing how we have witnessed the shift in the paradigm of the web from the power of content being held by a few individuals who had the knowledge to do so to the masses of people that can share their own insight, knowledge, and intelligence with the rest of the world.  In the end, with all this collective intelligence, will the world be a better place because of it?  As a web 2.0 enthusiast I can only hope so.