You're probably familiar with the ‘audience poll' lifeline in the game Kaun Banega Crorepati or KBC. Have you noticed that the audience usually gets the answer right? Now, why is that? Some people say that producers manipulate the answers. But that's not really the explanation. The better explanation lies in the group's collective intelligence. Let's understand what it is and how it makes modern finance special.
Wisdom of the Crowd
James Surowiecki's book The Wisdom of Crowds explores this idea. It documents several experiments showing that when many people make independent guesses, the average of those guesses comes close to the correct answer.
One famous experiment is the guessing of the number of jellybeans in a jar. When a finance professor ran this experiment in a classroom, the average guess was 871, while the actual number was 850. Over time, similar experiments have been conducted in many variations, like guessing the weight of objects, the number of items in containers, and so on. Often, the crowd's guess is near the correct number.
Surowiecki notes two key aspects of these experiments. First, participants made independent guesses. Second, sometimes individuals outperformed the crowd. Exactly what happens in KBC, too. He further argues that when a few people outperform the crowd, it encourages them to participate often and improve. In many ways, stock markets work exactly like this.
In markets, stock prices are the barometer. Thousands of investors buy and sell on their own, using their own information and gut feelings. The price arrived at in the process speaks more about the company than what one person could figure out. In the long term, it often represents the company's intrinsic value.
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The Danger of Large Unlisted Entities
But when this wisdom is absent, we enter grey zones in corporate finance.
Let's take the 2018 IL&FS collapse as an example. It shows what can go wrong when big financial institutions are not under the market's surveillance. IL&FS had a whopping 348 subsidiaries, but only 169 were officially reported. Also, its Risk Management Committee met just once every three years. Since IL&FS was an unlisted entity, the public at large was kept in the dark about some of these leading indicators.
Air India, again an unlisted company, suffered from a different problem. When the government wanted to sell Air India, it set a starting price at Rs. 12,906 crore. SpiceJet offered Rs. 15,100 crore, and the Tata Group bid Rs. 18,000 crore. But without a market price, all these numbers were just guesses. The real value could have been more or less than that.
In simple words, without transparency and market checks, mistakes and risks can snowball unnoticed. And listing helps keep these errors in check. Thus, the purpose of listing a company is not limited to fundraising. On a macro level, it gives us a real-time governance and judgment mechanism that no regulator, auditor, court or board can replicate.
Why Markets Reduce Errors
Mathematician Scott Page extends this idea through his Diversity Prediction Theorem. The formula: Collective Error = Average Individual Error – Prediction Diversity
In simple terms, the diversity of opinions helps cancel out individual mistakes. When many people approach a problem using different data, models, and assumptions, the group tends to make smaller errors than most individuals.
That's what happens in the stock market. Retail investors, institutional funds, analysts, and short sellers all form their own opinions about a company. Their trades combine those independent views into one number - the price. And that price usually carries less error than any single investor's estimate.
It's like running the KBC audience poll with only 10 people voting instead of 100. The larger and more diverse the crowd, the better the answer tends to be.
You can see this process play out after many IPOs. When a few angel investors and investment bankers decide on a price, the market may not accept it as is. On listing day, some post handsome gains, while some fall flat. After a few months, more people join in, study the company, and stock prices adjust accordingly. That means, as the number and information increase, collective judgment improves, and valuations become more realistic. That is also why most of the trade occurs in a few hundred widely analysed and tracked stocks.
It's like the KBC contestant analysing all four options in depth, or availing the 50:50 lifeline before the audience poll. In this situation, the audience has more information, and that helps them arrive at the answer better.
Final Take
Markets are not perfect. There are times when they get things wrong, and we may talk about them sometime later. But often over long periods, evidence suggests that large, diverse groups making independent decisions can produce accurate outcomes. That is the real power of a listed market. So, when a large corporation is not listed for a long time, it is, in a way, a bit of a disservice to the economy.
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