The wisdom of the crowds

January 15, 2016 09:30 PM

The aggregation of both experts and non-experts can offer investors strong estimates on complex questions regarding the market and relative equities or commodities. William Tetlock’s research reveals that the so-called “experts” end up producing less accurate forecasts than their non-expert competition. Whether it’s because of egos, tunnel perspective on the issue, an unwillingness to change perspectives or admit fault, experts are not always the best source of forecasting the future.

That same revelation was laid out in “False Prophets” (Modern Trader, July 2015), which highlighted how some of the best forward-thinking analysts have never spent a day on Wall Street. In addition, Estimize’s crowdsourced pool of experts and non-experts have produced forward-looking forecasts that are as much as 70% more accurate than projections released by Wall Street forecasters. 

Estimize has been a leading provider of crowd-source estimates. Launched in 2013, the company gathers earnings and economic estimates from 14,864 hedge fund, brokerage, independent and amateur analysts as of Dec. 5, 2015. The Estimize community is very large and quite diverse. Since its inception, it has created more advanced incentives for its community to improve its overall accuracy, including the implementation of confidence scores based on an analyst’s past performance. These metrics improve the overall integrity and accuracy of the crowdsourced data.

Prior to December, Estimize reached out to a sample (150 analysts) of their broad community to give Modern Trader an overview of where they foresee five important figures one year from now. The community members were asked to offer a stock price of Apple Inc. (AAPL), how much the Federal Reserve will raise interest rates (54 basis points), the expected U.S. unemployment rate and 2016 retail sales growth (see “Estimize estimates”). 

According to Estimize, the average 12-month outlook for Apple stock sits at $139.33 per share (median $140). The probability that the stock hits this level or higher is roughly 40%. The consensus from the stock price during the first week of December (when EidoSearch ran its conditional probability assessment) expects growth of roughly 17.21% for the year. Removing the five highest and five lowest estimates would produce a price expectation of roughly $138.99 per share.

Meanwhile, one-year consensus Wall Street expectations, compiled from 42 brokers, call for the stock to rise to $148.64 per share, with a median price of $150. 

About the Author

Garrett Baldwin is the Managing Editor of the Alpha Pages and the Features Editor of Modern Trader. An author and Baltimore native, he earned a BS in journalism from the Medill School at Northwestern University, an MA in Economic Policy (Security Studies) from The Johns Hopkins University, an MS in Agricultural Economics from Purdue University.