The Parable of the Ox

Summary

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More or Less: The Parable of the Ox (January 7, 2013)

Episode Overview

In this episode of More or Less, host Tim Harford uses the famous Parable of the Ox to explore what the story reveals about financial markets, the wisdom of crowds, and how abstraction from real assets can lead to flawed outcomes. The episode traces the origins and evolution of the story, its implications for how markets work, and its cautionary moral—featuring insights from journalist and author James Surowiecki and economist John Kay.

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Key Discussion Points and Insights

1. The Original Parable: Francis Galton and the Wisdom of Crowds

• Francis Galton’s Experiment: In 1906, Galton attended a country fair where a contest was held to guess the weight of an ox. The event provided a natural experiment on collective estimation.
• Crowd Diversity: The guessing crowd included "butchers and farmers" with expertise, but also laypeople, making it heterogenous. (James Surowiecki, [00:41])
• Unexpected Accuracy: Contrary to Galton’s elitist expectations, the average of all guesses (1197 lbs) was strikingly close to the actual ox's weight (1198 lbs).

  • "The crowd's judgment was essentially perfect. It was actually better than any one person in the crowd." — James Surowiecki ([01:37])

• Implication: This introduced the concept of the "wisdom of crowds," suggesting that aggregation of independent guesses can be remarkably accurate.

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2. The Parable’s Satirical Sequel: Evolution and Absurdity

• Continued Success and Challenges: The competition thrives; the original aim (to sell produce) is served well as long as lots of people participate. ([02:24])
• Losing Touch with Reality: When the scales break, the organizers choose to average guesses instead of weighing the ox, substituting estimation for measurement.
• Cheating and Regulation: With higher stakes, some try to game the system, leading to new rules to protect fairness and integrity.
• Meta-Guessing: The focus slowly shifts; success becomes less about knowing the ox and more about predicting what others will guess.

  • "The key to success lay not in correctly assessing its weight, but rather in correctly assessing what other people would guess, or even what others would guess others would guess, and so on." ([03:56])

• Financial Market Parallel: Models are developed to estimate what the guesses would have been, needing no knowledge of the real ox—just computational power.
• Absurd End: As attention focuses entirely on the game, no one feeds the ox and it dies, a metaphor for complete abstraction from fundamentals.

  • "And then the ox died. Among all this activity, no one had remembered to feed it." ([05:58])

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3. Analysis & Real-World Implications with John Kay

• Market Focus Shifts from Reality: The side-show (weight guessing) overwhelms the real purpose (supporting livestock and farmers)—just as financial markets sometimes lose sight of actual companies, focusing on speculation.

  • "The sideshow... takes over and overwhelms the underlying object of the fair." — John Kay ([06:08])

• Meta-Estimation: Market participants begin focusing more on what others believe, rather than on the real value or performance of assets.

  • "...in the kind of overdeveloped financial system we now have, what people are doing is not so much focusing on the underlying reality, but on what other people, like themselves, think about the underlying reality." — John Kay ([06:41])

• Problem of Disconnection: In modern markets, trading often involves existing claims instead of channeling real investment to businesses ("primary markets"), meaning markets serve more as vehicles to extract value than to create it.

  • "All the trade now is in secondary markets where people are buying and selling claims on companies that already exist and that don't need any further funding… It's a way you get money out of business." — John Kay ([07:15])

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4. Why Does It Matter? Economic and Social Risks

• Absence of Real Value Creation: Kay questions the true benefit of market activity that is divorced from real-world results.

  • "If we have a group of people who are sitting in a room exchanging bits of paper… what they had at the beginning of the day [is] much the same as what they had at the end." ([07:59])

• Resource Allocation and Opportunity Cost: Capital and talent are pulled into unproductive, speculative endeavors.
• Loss of Information: The episode asks if markets still generate information about actual business fundamentals, echoing concerns about the health of the metaphorical ox.

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Notable Quotes & Memorable Moments

• "The crowd's judgment was essentially perfect. It was actually better than any one person in the crowd."
  — James Surowiecki ([01:37])

• "The key to success lay not in correctly assessing its weight, but rather in correctly assessing what other people would guess, or even what others would guess others would guess..."
  — Narrator ([03:56])

• "And then the ox died. Among all this activity no one had remembered to feed it."
  — Narrator ([05:58])

• "The sideshow, the competition, actually takes over and overwhelms the underlying object of the fair..."
  — John Kay ([06:08])

• "...the stock market now isn’t a way you raise money for business. It’s a way you get money out of business."
  — John Kay ([07:15])

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Timestamps for Key Segments

• [00:41] — James Surowiecki recounts Galton’s country fair experiment and statistical findings
• [02:24] — Satirical evolution of the ox guessing contest begins
• [05:58] — "And then the ox died" punchline, highlighting the dangers of abstraction
• [06:08] — John Kay explains the market metaphor and its lessons
• [07:15] — Discussion on the shift from primary to secondary market activity
• [07:59] — Value and purpose of modern financial activities questioned

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Conclusion

This engaging episode uses a witty parable to vividly critique the abstraction of markets from real-world value and the risks of ignoring fundamentals. While the wisdom of crowds can be remarkable, overreliance on meta-estimation and secondary speculation can drain attention from what truly matters—a lesson as crucial in finance as it was in guessing the weight of the ox.

Transcript

[A]

Thank you for downloading from the BBC. For details of our complete range of podcasts and our terms of use, go to bbcworldserveys.com podcasts hello and welcome to More or Less with me, Tim Harford. Following the statistical star to a numerical epiphany, this week we're going to turn our attention to a parable about the financial markets. A parable about. About an ox. It's a story that starts with a trip that the British social scientist and statistician Francis Galton took to a country fair back in 1906. It's told by James Surowiecki, who recounts the story in his book the Wisdom of Crowds.

[B]

As he was walking through the fair that day, he came across this contest. An ox had been placed on display and the crowd around the ox was basically placing wagers on the weight of the oxygen. There was actually a huge crowd there that day, something like 800 people. And what's important about this crowd is that it was a relatively diverse crowd. While many of the people in the crowd were butchers and farmers and probably had some skill in being able to guess the weight of something like an ox, there were also a lot of people in the crowd who were not, at least on the surface, experts at all. So Galton, as he was watching this contest, it struck him that this made an interesting natural experiment.

[A]

Galton took all the tickets and ran some statistical experiments on them. With his elitist background, he assumed the average of the guesses would be woefully wrong. But this wasn't the case.

[B]

The crowd had guessed that the ox would weigh 1197 pounds. And when all was said and done, the ox ended up weighing 1198 pounds. So, in other words, the crowd's judgment was essentially perfect. It was actually better than any one person in the crowd. And this is a phenomenon that you can actually see over and over again. But the Galton example, I think, is a kind of perfect crystallization of this idea of the wisdom of crowds.

[A]

James Surwicki. Francis Galton's experiment at the country fair in Plymouth is famous and well documented. But not everyone has heard the rumours of what happened next. If you're sitting comfortably, will begin this tale.

[C]

As the years went by, the competition continued to be a success. More and more people came to guess and the farmer sold more of his produce, which was the original aim of the competition. But the scales became old and seemed to become less and less reliable. Repairs were expensive, much too costly. For the organisers of the fair, the competition looked to be in danger. Until they had a brilliant idea. Since the people who came to the fair were so good at guessing the weight of the ox, why weigh the beast at all? It wasn't necessary to repair the scales. They would simply ask everyone to guess the weight and take the average of their estimates. Newly invigorated and without the need for expensive equipment, weight guessing competitions became all the rage. But with popularity came high stakes. Some people tried to cheat. They even tried to get privileged information from the farmer who had bred the ox, offering presents and lavish dinners in return. The organisers became scared. If some people had an edge, others would be reluctant to enter. With few entrants, you couldn't rely on the wisdom of the crowd. The process of weight discovery would be damaged. So strict rules were introduced to regulate the competition. The fear was calmed and the integrity of the weight guessing competition was upheld. But with regulation came innovation. Brighter analysts realised that understanding the nutrition and health of the ox wasn't that useful anyway, 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 even what others would guess. Others would guess, and so on. As the money stacked up, the professional weight guessers and analysts congratulated themselves on how clever they were. A few lone voices tried to be heard over the roar of trading of the latest information. Some, such as old farmer Buffett, claimed that the results of this process were more and more divorced from the realities of ox rearing. But his words went unheeded. True, Farmer Buffett's oxen did appear healthy and well fed, and his finances were ever more prosperous. But he was a simple countryman who didn't really understand how markets work. One difficulty was that sometimes there were few or even know guesses of the oxen's weight. But that problem was soon overcome. Mathematicians from the University of Chicago developed models which estimated what would have happened if there had actually been many guesses as to the weight of the animal and what 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 advisors 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

[A]

this imaginary tale, the Parable of the Ox, was written by John Kay and it first appeared in the Financial Times. And John's here to tell us what it means.

[D]

Well, what it's about, of course, is the development of financial markets and the relationship between financial markets and companies. And there are two or three aspects of the parable, I think, that are central. One is the idea that the sideshow, the competition, actually takes over and overwhelms the underlying object of the fair, which is actually to enable farmers to breed and sell their livestock and get money to invest in new livestock. And of course, that's really what we want the financial system to do. Second point is that in the kind of overdeveloped financial system we now have, what people are doing is not so much focusing on the underlying reality, but on what other people, like themselves, think about the underlying reality.

[A]

One thing that interested me is this question of, you know, the ox dies at the end. Implicitly, you think this is very damaging for. For somebody or for something. So what is being damaged? The economy or corporate profitability? You and me?

[D]

Yes. So what prompted me to write this, actually, was doing work in this government review of how equity markets in the UK were performing and realizing that there was now almost no trade in what people call primary markets. That means British companies using the stock market to raise funds for new investment. All the trade now is in secondary markets where people are buying and selling claims on companies that already exist and that don't need any further funding. And the paradox of that, I came to realize at the end, is that the stock market now isn't a way you raise money for business. It's a way you get money out of business.

[A]

But does this matter?

[D]

I think it matters a lot because we need to ask two questions, really. What value does this activity add and why is it so profitable? Or apparently profitable, because if we have a group of people who are sitting in a room exchanging bits of paper with each other, then at the end of the day, the value of the bits of paper which they've exchanged with each other will be much the same as what they had at the beginning of the day. And yet what this activity seems to be doing is attracting a lot of resource, both financial resource and people who might be doing more useful things in the real economy. And the other thing we need to worry about, and this is very much the theme of the Parable of the Ox, is whether this process is actually generating any real information about the underlying performance of companies, which is what we care about, rather than other people's guesses.

[A]

John Kay if you want more information about the program, you can go to our website, bbcworldservice.com more or less, and you can get in touch by emailing more or lessbc.co.uk. for now, though, goodbye. There are dozens of different podcasts now available from the BBC, including news, documentaries, science, business, arts and sport. For details of them all, go to bbcworldservice.com podcasts.