Predicting the Facebook IPO: The crowd gets it wrong

June 6th, 2012 by

microtask_facebook_ipoAn excess of confidence can be a dangerous thing. As Mark Zuckerberg ponders the jagged descent of Facebook’s share price and industry analysts scramble to explain the social network’s woes, the aura of optimism that heralded the Facebook IPO has evaporated.

So how did it all go so wrong? One clue may lie in the crowdsourced prediction site FacebookIPODayClosingPrice.com. The site was created in response to a suggestion by venture capitalist Chris Sacca that someone should create a forum where pundits could register their predictions before the big day. Although share markets are notoriously irrational, in a way it makes a lot of sense. Who better to predict something based on the whims of a crowd than a crowd?

When voting closed, a total of 2,261 Twitter users had predicted a price of $54. This was nearly $16 above the first day closing price of $38.60 (before dropping to a downright disastrous low of $30.94). Even billionaires make mistakes, but crowds are supposed to be infallible (or at least wise), right? So why did the crowd get it so wrong?

The Social Net Worth

First off, I wonder if the crowd had actually been betting its own money on the price it would have generated a more accurate guess. But otherwise, the site did everything right to properly harness the predictive power of collective reasoning: the vote didn’t exclude non-expert members, discussion was rampant on Twitter, and the experiment seemed to attract a healthy mix of views.

But a quick Twitter-stalking session reveals that of the 26 voters who correctly predicted a closing price of $38, only three were in any way experts (a Google+ engineer, a tech entrepreneur, and an analyst at Bloomberg, who probably deserves a promotion). The other correct answers came from all over the world, from Swiss web designers, Australian students and American Hockey fanatics.

In fact, it looks like experts gave the least accurate predictions. When the results are ordered by number of followers (with Chris Sacca’s 1,338,761 followers taking him and his guess of $56 to the top of the list), it becomes clear that venture capitalists, industry insiders and pundits were far too optimistic in their predictions.

The more you know, the less you know

This may not come as a surprise to regular readers of this blog who remember the concept of collective ignorance, the name given to the spooky ability of non-expert crowds to generate more accurate predictions than teams of experts, under the right conditions. The effect is partially explained by the possibility that insiders are more sensitive to hype, and that they have more invested (in some cases, literally) in the outcome.

Though the sample size of 2,261 is too small to draw firm conclusions, the results of Proud’s experiment are consistent with what we know about channelling the wisdom of the crowd. Despite the presence of hundreds of analysts, entrepreneurs and investors, it was the average citizen whose aggregate predictions were closer to the mark.

By offering a real-world example, FacebookIPODayClosingPrice.com adds to the weight of academic studies into curious crowd effects like collective ignorance. What initially looks like a crowdsourcing failure is actually a fascinating opportunity for analysis (and Twitter-stalking). This may be small comfort to those who lost money in the IPO, but will hopefully assist future projects harness the wisdom of the crowd.



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