# Wisdom of the institutional crowd

## TL;DR

This paper demonstrates that institutional investors collectively exhibit rational portfolio structures that minimize transaction costs, illustrating a form of Wisdom of the Crowd despite individual deviations from rationality.

## Contribution

It reveals that institutional portfolios collectively align with optimal strategies, highlighting the importance of considering constraints in assessing collective rationality.

## Key findings

- Institutional portfolios account for transaction costs optimally.
- Individual deviations from rationality are common.
- System-wide rationality emerges despite irrational individual behaviors.

## Abstract

The average portfolio structure of institutional investors is shown to have properties which account for transaction costs in an optimal way. This implies that financial institutions unknowingly display collective rationality, or Wisdom of the Crowd. Individual deviations from the rational benchmark are ample, which illustrates that system-wide rationality does not need nearly rational individuals. Finally we discuss the importance of accounting for constraints when assessing the presence of Wisdom of the Crowd.