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The “Wisdom” of Crowds

Want to know when to buy a home in the San Fernando Valley? The geniuses at Zillow propose a solution to your dilemma, by releasing their latest widget – promising a surefire way to pick the bottom of the market. No, Zillow does not have a crystal ball either, but the widget they have created just leaves it up to the “wisdom” of crowds, and lets everyone who visits vote for when the market will have reached bottom, like this (I ran this on 7/15/09 in the unlikely event that anyone is keeping track for posterity):

Get it? Since we are all clueless on timing the bottom of the market, let’s vote and perhaps our collective cluelessness will add up to some “wisdom” capable of predicting the future. (I don’t think so. Nothing could be sillier, except, perhaps, Zestimates™, but that’s the subject of a different post.)

While not entirely devoid of some scientific basis, using the “wisdom of crowds” to time the market will likely prove no more (or less) accurate than the old methods of reading tea leaves, breathing the fumes of a decomposing python, or paying attention to the predictions of the chief economist of the National Association of Realtors, for that matter. Why? Well, for one reason even if you played along and assumed the crowd was “wise” and the majority therefore “knew” how to pick the exact market bottom – - the widget is too general to be of much use. As we saw during the real estate crash, the declines in real estate markets were anything but uniform across different markets. (Some are still likely due for a big drop, while others are seemingly on their way back up, at least in some price ranges.) So even a perfectly prescient guess about a general “market bottom” would leave us clueless about the markets we care about. If crowds were so smart, how come we ended up with all the democratically elected politicians we’ve been saddled with over the years?

Want to know the exact market bottom for homes in the San Fernando Valley? I’ll let you know as soon as I’ve installed my new, patent pending, “tea leaves in the bottom of a cup” widget.