The Wisdom of Crowds

In this best seller, James Surowiecki tell us how we can leverage the collective intelligence of a group of people as opposed to depending heavily on the individual brilliance of one or a few people. Surowiecki also examines situations when the judgment of a crowd can go awry. Many of the principles covered in the book can be used by companies profitably to improve decision making and managerial effectiveness.

Under the right circumstances, groups of people can be remarkably intelligent and often smarter than the smartest people in them. Even if most of the people in a group are not exceptionally well informed, they can still reach a collectively wise decision.The author’s key message is that instead of searching for one or a few experts to solve a problem, it might be better to tap the wisdom of the crowd.

The author deals with three kinds of problems in this book. Cognition problems are those which have definitive solutions. In case of coordination problems people in a group have to coordinate their behavior with each other. Cooperation problems involve getting self interested, distrustful people to work together. The author examines how the wisdom of crowds can be leveraged to deal with each of those problems.

Some real life examples illustrate the wisdom of crowds.We all know how effective the audience poll is in Kaun Banega Crorepati (KBC), whereas “phone a friend” often produces the wrong answer. We know this intuitively but more systematic studies have been done in the West. In the popular TV show, “Who wants to be a millionaire?” on which KBC is based, the experts gave the right answer 65% of the time but the audience did so 91% of the time.

The way Google works is also on the basis of the wisdom of crowds. Google is based on an algorithm that attempts to let all the web pages on the Internet decide which pages are relevant to a particular search. Google interprets a link from one page to another as a vote. Votes cast by pages, that are themselves more important, receive more weight.

We can view the stock market as a crowd. When the Space Shuttle, Challenger blew up on January 28, 1986, the stock markets hammered down the price of one of the four contractors involved in the project, Morton Thiokol. No public information was available to indicate that it was indeed this vendor who was the main culprit and not the other three. Yet, six months later, the presidential commission endorsed the view of the market by concluding that it was indeed the O-ring seals supplied by Thiokol that was responsible for the damage. There was no evidence of insider trading, i.e., the crowd did not have access to any privileged information. Yet the crowd had established its wisdom beyond doubt.

A mathematical truism forms the basis for the wisdom of crowds. When a large group of diverse, independent people estimate something, each estimate has two components, the expected value and the error. When the estimates are added, the errors cancel out. That is why when crowds figure out the expected value, the accuracy levels are often high.

A group works effectively because of diversity of opinion, independence (people think independently), decentralization (people draw on locally available knowledge) and aggregation (mechanism for turning private judgments into a collective decision).

At the same time, we must remember that groups work well only under certain circumstances but not under others. They need rules to maintain order and coherence. Communication within the group is important though excessive communication is not desirable. This means that people within the groups must not be able to influence each other too much.

Read this great book to know more.