Tuesday, March 2, 2010

Call the Close

I stumbled across a new contest being held at CNBC's website called "Call the Close." Basically, you take a stab at guessing the closing number on the Dow Jones Industrial Average. (Side note: even though it is the most commonly reported market number, it's far from being a good representation of the stock market as a whole, since it only represents 30 of the very largest companies. But that is a conversation for another day.)

I've been interested in this kind of thing for a while, and even moreso since reading The Wisdom of Crowds. The book describes the observation that, while almost all individuals are pretty lousy predictors of pretty much anything, as a whole, crowds usually do a pretty good job.

What intrigues me about this contest is that it is a little different from what they talk about in the book. The example that the book opens with is how a bunch of people managed to guess the weight of a cow within a couple pounds. While very few people even got within 20 pounds of being correct, the group's average was extremely close. In contrast to this attempt to guess at a fact, the contest here is to guess at an expectation. Since stock market prices reflect people's expectations, this contest is essentially people forming expectations of other people's expectations (a meta-expectation if you will).

So shouldn't the average guess be really close to the closing price? Well, not really. There is a really big difference between the set of people who are playing contests on CNBC and the people who are out there making markets.

In any case, the first day's results are in: the average guess was 10396.88 (a 71.62, or 0.69% increase), and the actual close was 10403.79 (78.53, or 0.76% increase). That's pretty impressive, considering the stock market can realistically swing plus or minus 2% any given day. Two guys actually guessed within one hundreth of a point to win the first day, and fifteen people guessed within a third of a point. Can't wait to see how long it is before someone gets it exactly.

Link to the contest: http://calltheclose.cnbc.com/close_callers.html

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