Side-bets versus reality - parable of the ox

The FT article was prompted by a reference to renowned statistician Francis Galton in James Surowiecki's The Wisdom of Crowds book, published last year. As it happens, Francis Galton was, in 1906, setting out to confirm Scottish journalist Charles Mackay's satirical 1841 history of mass manias and popular folly. Anyway, John Kay took the Galton story on, in a fictional extension via his parable, to highlight how today's financial markets, particularly in the UK and US, are disconnected from the real business of what they were set up to do: provide funds to companies/individuals who would invest that money in, for example, making something or adding value to something. In brief, the parable is about a guess-the-weight competition held by a farmer at a fair. The intention was to gain attention, gain money to invest in his ox herd and so sell more meat produce. Galton found that the average of all the guesses made by the 800 participants was near as damn it right, hence the wisdom of the crowds. Mr Kay's extension of this real story sees the weighing machine break, but the fair organisers see they can simply aggregate all guesses and get a 'correct' weight for the ox, so there's no need to fix it. The competition lives on, becoming more popular. But then the disconnect comes in, with people betting on what others are guessing, not on the actual weight of the ox. There is more elaboration and extrapolation, but the result is that the ox dies, since its weight is no longer the focus. In the 'More or Less' interview, Mr Kay elucidates further. He highlights that, for every £50 or so that is traded in the UK's foreign exchange markets, only £1 is being used to support real trade. The other trades are just people handing bits of paper to one another and taking a profit, or loss, as they do so. He also cites that a majority of share trading in the UK and US is between computers, not people, and that most trading on the UK stock market is performed in secondary markets, not the primary markets where companies are looking for capital to support growth. Mr Kay suggests that such effort, cleverness and money could be put to better, more productive use in the real economy. It is an echo of Lord Adair Turner's remarks back in August 2009 that parts of the City of London's financial shenanigans were "socially useless". But the game continues much the same. Witness also a recent petrol price hike driven, it is suggested, by futures' traders, not anything real. First published in Machinery, February 2013