Chapter eleven of Wisdom of crowds focused on markets. Most of the time markets do there job very well. A market’s job is to assign correct values to stocks and commodities. Markets function well at determining value because there are a lot of educated people whose job is to buy stocks when they are undervalued, making the stock go up, and sell stocks when they are overvalued, making the stock price go down.
Just like any wise group a market needs have a group of decentralized, diverse, independent people, who cooperate. When a market stops being diverse and independent a bubble occurs. A bubble is when a stock or group of stocks becomes highly overvalued.
Bubbles occur when people stop thinking about what the value of a given stock is and what they think other people think the value is. After all if you can predict that everyone will overvalue a stock you should buy it and sell it before people come to their senses.
I demonstrated the difference between thinking for yourself and bubble thinking by asking everyone to pick their favorite artist out of a group of six artist or bands and then try to pick the artist or band that most people would pick. With just one acception everyone picked either Kanye West or Taylor Swift. Taylor Swift and Kanye shared the favorite vote. Taylor Swift won the popular vote by one vote. Only six people didn’t change their answer from the first to the second vote. That means eight people thought their favorite was not the most popular artist.