Is belief in the wisdom of crowds self-defeating? This is one question raised by the "slump."
Put yourself in the position of an intelligent investor back in the spring. You know that the yield curve is a vastly better economic forecaster than economists are, and its inversion signals that a recession is quite likely. You know too that there's a good correlation between industrial production and equity returns. So you're tempted to dump shares.
But then you remember the wisdom of crowds. Surely, you figure, the fact that the crowd - not just of economic forecasters but of other investors - isn't thinking of recession shows that one isn't likely. And the market must be discounting the possibility anyway: price-earnings ratios were quite low back then.
So, you decide not to sell.
In this sense, belief in the wisdom of crowds proved self-defeating. In believing the crowd was right, you didn't sell shares. The upshot was that shares were left over-priced, because some information about the likelihood of recession - the opinions of those who believed both the yield curve and wisdom of crowds - could not be embodied in prices.
Because some people thought crowds were wise, the crowd - the stock market - proved not to be so.
Now, this doesn't show that the wisdom of crowds is logically incoherent. Its advocates accept that one condition for crowds to be wise is that individuals' beliefs be independent, uncorrelated. Which is exactly the condition violated in this case.
What it does mean, though, is that the idea's relevance might be greatly limited in practice.
The problem here is not the same as the well-known paradox of efficient markets - that if everyone believed markets were efficient, no-one would bother exploiting price-relevant information and so markets would be inefficient.
In that case, information lies around, but is unused.
In the case of the wisdom of crowds, information is actually destroyed - the bearish beliefs of those who expected recession were reduced by their belief in the wisdom of crowds. In this sense, belief is the wisdom of crowds is positively damaging.