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The Paradox of Crowd Wisdom: When Collective Intelligence Fails in Financial Markets
Abstract
The notion of “wisdom of crowds” postulates that collective decision-making often outperforms individual judgements. However, in financial markets, this collective intelligence can falter, leading to inefficiencies and anomalies. This study investigates the factors contributing to the failure of collective intelligence in financial markets, specifically examining information cascades, cognitive biases, market sentiment, herding behaviour, and market performance. Using the Adaptive Market Hypothesis (AMH) as a theoretical framework, the research explores how these factors interact and impact market efficiency. Employing panel data regression and quantile regression, the study provides a comprehensive analysis of market dynamics across different conditions. The findings underscore the crucial roles of investor education and regulatory environment in moderating and mediating these relationships, offering valuable insights for policymakers, financial managers, and investors in enhancing market stability and efficiency.
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