Abstract

We designed and implemented a so-called Wisdom of the Crowd experiment to demonstrate how information in markets set market prices. Wisdom of the Crowd concepts suggest that random, uncorrelated answers to a simple problem or question given by a group of people will often converge on the correct answer, even though few (of none) of those answering have special knowledge regarding the question. This is similar to the way markets synthesize bids and offers from participants to settle on a price. Students in two courses, production economics and futures trading, were asked to guess the number of jelly beans in a jar. The statistical summary of all guesses was presented to each course in a follow-up lecture on the role of prices and markets in the economy. Results deviated from what we expected in that the average guess of each course was far below the actual number of jelly beans in the jar. We hypothesized this was a result of how the experiment was implemented and informally confirmed this hypothesis with a post hoc experiment. The flexibility of the experiment allowed us to use the bias present in the guesses as a part of the lecture on prices and markets. We pointed out that if all market participants are affected by external information, prices can be artificially different from underlying asset values. Post-experiment surveys indicated that 80% of students saw a clear linkage between the experiment and how markets set prices. Seventy five percent of students indicated that the experiment gave them a better understanding of prices and markets and 93% stated the experiment would be beneficial for future students.