Trading firms (and student groups) as the honeybees' collective cognitive entity

I just remembered that last week or so I read about professor Barabasi the NU physicist/network scientist (we read his work on free networks). It was in Voice in the quotable and notable section about his work that was quoted in the Science News.

It was summarizing his new research about how individual ideas in a trading firms created a sort of collective wisdom. It ended by saying that the research brings a counter intuitive idea that it's not better, at least in this situation, to swim against the flow, citing Warren Baffet as an example. Rather, and again they are referring to this specific situation of daily trading, it's better to stick to what the majority are doing as his research shows that it pays off better.

I have conflicting views about this finding. First of all, to support it, in my investment class, it was mentioned that quite ironically over the past 50 or so years, managed/active mutual funds did NOT perform, on average better than index funds. Index funds are basically funds composed of shares that follow a certain index (s&p 500 companies and such), and they are passive. Now this is puzzling as a fund that is actively managed by an intelligent person who is monitoring stocks closely and studying the economy and the firms continuously should be able to yield a performance better than a computerized passive fund. But research shows the opposite.

My own experience in this class yielded similar results. I established by carefully researching companies and their fundamentals (financials,ratios..) and diversified to decrease risk. The result? I lost 1% over the semester (and many in my class did too) where as the passive s&p gained 3%. Luckily I didn't have to pay anyone anything as this was all imaginary money, or I'll be eating noodles and peta bread for a really long time!

So tying this to Seeley's idea of honeybees as a cognitive entity, I can see a trading firm made of individual traders collectively performing better as opposed the one or two managers of mutual funds. For honeybees finding a new home is quite complex requiring the aggregation of the ideas of many individual bees whose ideas in isolation would be rather stupid. Likewise, for humans the process of making an investment decision which almost includes everything from global economy to human behavior and natural disasters definitely requires the aggregation of numerous human minds no matter how intelligent each is individually.

I still recall in one of my favorite (and very painful) computer science classes the professor always reminded as, no matter who you are, at some point you WILL hit a "complexity barrier." Taking this class know, and reading about honeybees, I know kind of understand why he always insisted on us working on groups no matter how much we loathed that.

Of course there is still the other side of the story, cognitive entities don't always yield a desirable outcome. The process itself might easily lead to groupthinking, or even group-not-thinking (everyone think the other did their homework,..). It can often be less productive as opposing ideas rather than strengthening and unleashing the truth can just cause conflict. If we add the human element, we get all kind of cognitive biases that arise from working in groups such as conformity, perfectionism, competition, thrust for power, dominance,.. and the list goes on.

In close, collective wisdom definitely has its own merits but that has to be contextualized.