Particle Swamp Optimization (PSO): Does Wisdom of the Crowd work in Investing?

What is PSO and how was it used here?

Particle Swarm Optimization (PSO) is a computational method inspired by the way groups of animals, like birds or fish, move together in search of food. If you see a swarm of drones doing a light display or videos of wild geese flying in formation, or a school   of fish moving as one superorganism when alarmed that’s PSO.  In other words, PSO embodies the old adage of “Wisdom of the Crowd.

In finance, PSO is used to find the best mix of investments by simulating a "swarm" of possible portfolios, each adjusting its mix based on both its own experience and the experience of others in the swarm. PSO and the “wisdom of the crowd” in Finance is not unlike the real-life practice of following the crowd, listening to rumours and over-reaction to extreme changes in the market environment.

Does Wisdom of the Crowd work in Investing?

In this project, the swarm was made up of individual investors. The buy sell rules and prices were decided by the majority and investors adjusted their investing decisions by following the herd. The primary rule was to minimize risk/return i.e. to maximize the Sharpe Ratio, with the constraint that all the weights must add up to 100%. There were no limits on how much could be allocated to each stock, so the optimizer sometimes put very large weights on a few stocks and ignored others.

Results (Based on holding a portfolio from 2 Jan 2024 to 4 July 2025)

• PSO portfolio has an annualized return of 8.49% with a volatility of 11.64% and a Sharpe ratio of 0.73.
• The STI Index delivers a higher annualized return of 15.51% with a volatility of 12.99% and a Sharpe ratio of 1.19.
• The 3-bank portfolio outperforms both, with a 21.62% annualized return, 16.86% volatility, and the highest Sharpe ratio of 1.28.

This makes it clear that, the PSO portfolio performance is not as strong as simply investing in an ETF of STI Index or a portfolio that holds only the 3 local banks (DBS, UOB, OCBC). The higher Sharpe ratios for the STI and 3-bank portfolios also indicate better risk-adjusted returns, reinforcing the value of diversification and practical investment strategies.The result as can be seen from the chart above is that the PSO portfolio underperforms the STI. This analysis shows that simply following what the "crowd" (or an algorithm mimicking crowd behaviour) does, without considering diversification or practical investing rules, can lead to portfolios that are very risky and unstable. It’s a good reminder that in investing, chasing the highest return without regard for risk or common sense can backfire, even with blue-chip stocks. Instead, a more balanced and diversified approach often leads to better long-term results.