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January 16, 2015

It’s The Crowd versus Wall Street, and the Crowd is Winning

By Bizking2u (Own work) [CC-BY-SA-4.0], via Wikimedia Commons

There’s a ritual that takes place on Wall Street every few months around earnings season, when companies announce how much in profits they’ve earned for the quarter.  Weeks before the announcement, company officials tell the Wall Street research analysts that cover their firms what they expect to earn. The analysts then dutifully release their estimates in line with that guidance. When it comes time to report the earnings, most companies handily beat those estimates.

This coordinated dance is called the earnings game. And while investors have long known it’s designed to make companies look good—and win banking business for the Wall Street firms—they’ve had few alternatives.

Estimize, a two-year old start-up based in New York, is out to change that by crowdsourcing estimates. The current system “is very much stuck in the 1980s, before there was any user-generated content,” explains Leigh Drogen, the Millennial-generation founder of Estimize. His experiences as a quant trader whose hedge fund profited from the earnings game inefficiencies, and then at Stock Twits, a social media-rive investor site, convinced him of the need for a new solution. “I thought, it’s going to happen at some point. There will be platforms that allow everyone to contribute their views in a structure way that will better represent the market than those 300 sell-side analysts.”

Tapping into the Wisdom of the Crowd

Like the famous experiment where a crowd of hundreds of people was asked to guess the weight of an ox and their average guess astoundingly came within one pound, Drogen is betting that the wisdom of the crowd will provide better financial data that more accurately reflects market sentiment.

Estimize has built a diverse community of close to 6,000 analysts, portfolio managers, traders, independent researchers and industry experts who contribute estimates, to create what Drogen calls the world’s most robust financial data set. And so far, his hunch has been correct: Estimize’s consensus estimates have proven more accurate than the Wall Street consensus 70% of the time.

The more people that use us, the more efficient we will get,” says Drogen, citing the company’s cheeky tagline “Sample size matters.”

Crowdsourcing has been gaining steam for years, but Drogen believes we’re entering a second generation of crowdsourcing, where data is more reliable and useful. For example, Estimize employs an algorithm that reviews individual estimates for reliability over time.  It also allows psuedonymity for contributors. That way, he says, people won’t get hung up on the brand name—for example, an analyst from a hot hedge fund—and instead let the contributor’s track record speak for itself.  “We don’t want people to focus on the name of the fund you work for, but on your record of accuracy,” he says.

Financial Data is Being Unbundled

Drogen hopes to benefit from the unbundling of financial products. Just as cable TV and media is being unbundled, so, too, is the financial data offered by big firms such as Bloomberg, Thompson Reuters and First Call, which have long provided packages of data and services to traders and fund managers.

Estimize provides estimates on more than 1,000 stocks. The estimates are freely available on the web site; the company makes money buy providing real-time feeds to hedge funds and other financial firms. Its data is now carried by Bloomberg, and is increasingly cited by news outlets including the Wall Street Journal, CNBC and CNN.

And that’s just the beginning. Having tackled the earnings game, the company is expanding into new areas. It’s crowdsourcing estimates for 25 economic indicators ranging from GDP to nonfarm payroll. And a brand new service, Mergerize, has already correctly flagged five mergers, including Facebook’s acquisition of Oculus and Google’s purchase of Skybox.

So are Wall Street analysts, already hobbled by a regulatory settlement in the 2000, doomed for the dustbin? Drogen says he’s not out to put sell-side researchers (so-called because they work for firms in the business of recommending stocks) out of business. “We don’t want to destroy them, in fact we want them on our platform,” he says. “But we want them to recede into the background because of their conflict of interest.”

Five years from now, Drogen says, “we should be the quoted consensus.”

“If we’re successful with these things, we will have changed the industry in terms of how it looks and works from the inside.”


Amy Cortese is an award-winning journalist and the author of Locavesting (Wiley, 2011), about the local investing movement and its potential to rebuild the economy, one community at a time. Her coverage of business, technology and social/environmental issues has appeared in Business Week, The New York Times, The New York Times Magazine, Mother Jones, Plenty, Wired, The Daily Beast, and many other publications. Used with the permission of ‘The Network, Cisco’s Technology News Site.’