Cliff Asness: Social Media Turns Wisdom of Crowds Into Market Chaos

In a conversation on the Odd Lots podcast, Cliff Asness of AQR Capital Management presented a compelling case for why modern markets may be increasingly prone to significant dislocations from fundamental value. His thesis, detailed in his piece “The Less Efficient Market Hypothesis,” points to structural shifts that challenge the classic notion of crowd wisdom.

He argues that for markets to be efficient in any degree, a crucial mechanism must function. “This famous idea of the wisdom of crowds has to be helping us a lot,” Asness stated.

This concept relies on independent judgment, where mistaken views cancel each other out. “The hypothesis that we’re all geniuses is never going to fly, right? So the wisdom of crowds and, you know, well, says, even if on average, most people don’t know the answer, the stupid answers cancel.”

The critical factor that flips this wisdom into folly, according to Asness, is the loss of that very independence, largely driven by modern technology.

He illustrates this with an analogy from the game show ‘Who Wants to Be a Millionaire?’, where the ‘ask the audience’ lifeline was remarkably reliable. “The wrong answers cancel out because they’re all over the place, and the right answer doesn’t—because everyone who knows it gives the same one,” he explained, highlighting how independent judgments create true crowd wisdom.

The danger emerges when this dynamic changes. “If you ruin the independence and I think we ever come up with a better vehicle for turning a wisdom of crowds into, craziness of mobs, then social media, I’d be hard pressed to to describe it.”

This erosion of independent thought fosters an environment where substantial and prolonged deviations from fair value are not just possible but increasingly probable.

Asness’s analysis in “The Less Efficient Market Hypothesis” suggests that the very tools connecting us are making markets fundamentally more susceptible to collective mania, turning a source of strength into a potential weakness.

You can watch the entire interview here: