Abstract:
The Wisdom of the Crowd applied to financial markets asserts that pricesrepresent a consensus belief that is more accurate than individual beliefs.However, a market selection argument implies that prices eventually reflectonly the beliefs of the most accurate agent. In this paper, we show how toreconcile these alternative points of view. In markets in which agents naivelylearn from equilibrium prices, a dynamic Wisdom of the Crowd holds. Marketparticipation increases agents’ accuracy, and equilibrium prices are moreaccurate than the most accurate agent.