The dumb agent theory (DAT) states that many people making individual buying and selling decisions will better reflect true value than any one individual can. In finance this theory is predicated on the efficient-market hypothesis (EMH). One of the first instances of the dumb agent theory in action was with the Policy Analysis Market (PAM); a futures exchange developed by DARPA. While this project was quickly abandoned by the Pentagon, its idea is now implemented in futures exchanges and prediction markets such as Intrade, Newsfutures and Predictify. The DAT is technically a hypothesis, not a theory.
While first mentioned strictly by name in relation to PAM in 2003, the dumb agent theory was originally conceived (as the Dumb Smart Market) by James Surowiecki in 1999. Here, Surowiecki differentiated from the EMH stating that it "doesn't mean that markets are always right." Instead, he argues that markets are subject to manias and panics because "people are always shouting out" their stock picks. This, in turn, results in other investors worrying about these picks and becoming influenced by them, which ultimately drives the markets (irrationally) up or down. His argument states that if market decisions were made independently of each other, and with the sole goal of being correct (as opposed to being in line with what others are choosing), then the markets would produce the best choice possible and eliminate biases such as groupthink, the bandwagon effect and the Abilene paradox.
Read more about Dumb Agent Theory: PAM, Prediction Markets, Dumb Agent Theory Outside The Financial Markets
Famous quotes containing the words dumb, agent and/or theory:
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Is my destroyer.
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My youth is bent by the same wintry fever.”
—Dylan Thomas (1914–1953)
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—Jerry Alan Fodor (b. 1935)
“A theory of the middle class: that it is not to be determined by its financial situation but rather by its relation to government. That is, one could shade down from an actual ruling or governing class to a class hopelessly out of relation to government, thinking of gov’t as beyond its control, of itself as wholly controlled by gov’t. Somewhere in between and in gradations is the group that has the sense that gov’t exists for it, and shapes its consciousness accordingly.”
—Lionel Trilling (1905–1975)