Alf has been introduced today (so to speak) to Sir Francis Galton and is more than a tad envious.
For starters, this Galton feller was knighted (in 1909).
More than that, he is described (here) as an English Victorian polymath: anthropologist, eugenicist, tropical explorer, geographer, inventor, meteorologist, proto-geneticist, psychometrician, and statistician.
Galton had a prolific intellect, and produced over 340 papers and books.
He created the statistical concept of correlation and widely promoted regression toward the mean, which no doubt was big deal in its day, although Alf struggles to tell you what it actually means.
He was the first to apply statistical methods to the study of human differences and inheritance of intelligence, and introduced the use of questionnaires and surveys for collecting data on human communities, which he needed for genealogical and biographical works and for his anthropometric studies.
He was a pioneer in eugenics, coining the term itself and the phrase “nature versus nurture”. His book Hereditary Genius (1869) was the first social scientific attempt to study genius and greatness.
As an investigator of the human mind, he founded psychometrics (the science of measuring mental faculties) and differential psychology and the lexical hypothesis of personality.
He devised a method for classifying fingerprints that proved useful in forensic science. He also conducted research on the power of prayer, concluding it had none by its null effects on the longevity of those prayed for.
As the initiator of scientific meteorology, he devised the first weather map, proposed a theory of anticyclones, and was the first to establish a complete record of short-term climatic phenomena on a European scale.
He also invented the Galton Whistle for testing differential hearing ability.
He sounds like a smart-arse-and-a-half.
But here’s the thing.
He also has helped Alf to comprehend (at long last) what the libor scandal is all about.
A further contribution to this understanding comes (here) from a book entitled The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations.
This is a book written by James Surowiecki (published in 2004) about the aggregation of information in groups, resulting in decisions that, he argues, are often better than could have been made by any single member of the group.
The book presents numerous case studies and anecdotes to illustrate its argument, and touches on several fields, primarily economics and psychology.
The opening anecdote relates Francis Galton’s surprise that the crowd at a county fair accurately guessed the weight of an ox when their individual guesses were averaged (the average was closer to the ox’s true butchered weight than the estimates of most crowd members, and also closer than any of the separate estimates made by cattle experts).
A final name must be thrown into Alf’s list of acknowledgements.
It’s the name of John Kay, who has written a primer on the libor and some of the other fancy things financiers do (here).
He starts by noting Galton’s observation in 1906 about the competition to guess the weight of the ox at a country fair.
Eight hundred people entered. Galton, being the kind of man he was, ran statistical tests on the numbers. He discovered that the average guess (1,197lb) was extremely close to the actual weight (1,198lb) of the ox.
And yes, Kay recalls that this story was told by Surowiecki, in his entertaining book.
He goes on to say that not many people know the events that followed.
His explanation is not easily abridged or otherwise edited. Alf will make no attempt to do so.
Here’s what happened…
A few years later, the scales seemed to become less and less reliable. Repairs were expensive; but the fair organiser had a brilliant idea. Since attendees were so good at guessing the weight of an ox, it was unnecessary to repair the scales. The organiser would simply ask everyone to guess the weight, and take the average of their estimates.
A new problem emerged, however. Once weight-guessing competitions became the rage, some participants tried to cheat. They even sought privileged information from the farmer who had bred the ox. It was feared that if some people had an edge, others would be reluctant to enter the weight-guessing competition. With only a few entrants, you could not rely on the wisdom of the crowd. The process of weight discovery would be damaged.
Strict regulatory rules were introduced. The farmer was asked to prepare three monthly bulletins on the development of his ox. These bulletins were posted on the door of the market for everyone to read. If the farmer gave his friends any other information about the beast, that was also to be posted on the market door. Anyone who entered the competition with knowledge concerning the ox that was not available to the world at large would be expelled from the market. In this way, the integrity of the weight-guessing process would be maintained.
Professional analysts scrutinised the contents of these regulatory announcements and advised their clients on their implications. They wined and dined farmers; once the farmers were required to be careful about the information they disclosed, however, these lunches became less fruitful.
Some brighter analysts realised that understanding the nutrition and health of the ox was not that useful anyway. What mattered were the guesses of the bystanders. Since the beast was no longer being weighed, the key to success lay not in correctly assessing its weight, but rather in correctly assessing what other people would guess. Or what others would guess others would guess. And so on.
Some, such as old Farmer Buffett, claimed that the results of this process were more and more divorced from the realities of ox-rearing. He was ignored, however. True, Farmer Buffett’s beasts did appear healthy and well fed, and his finances were ever more prosperous: but, it was agreed, he was a simple countryman who did not really understand how markets work.
International bodies were established to define the rules for assessing the weight of the ox. There were two competing standards – generally accepted ox-weighing principles and international ox-weighing standards. However, both agreed on one fundamental principle, which followed from the need to eliminate the role of subjective assessment by any individual. The weight of the ox was officially defined as the average of everyone’s guesses.
One difficulty was that sometimes there were few, or even no, guesses of the oxen’s weight. But that problem was soon overcome. Mathematicians from the University of Chicago developed models from which it was possible to estimate what, if there had actually been many guesses as to the weight of the animal, the average of these guesses would have been. No knowledge of animal husbandry was required, only a powerful computer.
By this time, there was a large industry of professional weight guessers, organisers of weight- guessing competitions and advisers helping people to refine their guesses. Some people suggested that it might be cheaper to repair the scales, but they were derided: why go back to relying on the judgment of a single auctioneer when you could benefit from the aggregated wisdom of so many clever people?
And then the ox died. Among all this activity, no one had remembered to feed it.
And now you too will have a pretty good idea of what the libor scandal has been all about.