The Wisdom of Crowds

Summary of: The Wisdom of Crowds
Why the Many are Smarter than the Few and How Collective Wisdom Shapes Business, Economies, Societies, and Nations

Author(s) / Editor(s)

James Surowiecki argues that with the proper structure and characteristics, large groups of ordinary people can outperform small groups of experts in making decisions and predictions.

Keywords

Publication Reference

Published in/by
Random House
Date
2004

Findings

  • Specialized expertise tends to be over valued. In fact, large groups, structured properly, can be smarter than the smartest member of a group. On average, the wisdom of crowds will come up with a better answer than any individual could provide.
  • Local knowledge is often critical for solving cognitive problems. Mechanisms of aggregating distributed, independent local knowledge can provide important insight for solving these problems.
  • Major corporate decisions should be informed by decision markets, not made by them. But when decisions are made, power should not be concentrated in the hands of one person. The more important the decision, the more important it is that it not be left in the hands of a single person.
  • A group’s intelligence depends on a balance of independent information that each member holds and common information that everyone in the group shares. The combination of independent information, some right and some wrong, helps to keep the group smart.

James Surowiecki argues that with the proper structure and characteristics, large groups of ordinary people can outperfom small groups of experts in making decisions and predictions. Through numerous examples (Iowa’s electronic prediction market, the Hollywood Stock Exchange, The Bay of Pigs decision, NASA’s Columbia disaster, football strategy, corporate decision making, and others) Surowiecki discusses the weaknesses of traditional decision making and shows how collective wisdom can be aggregated from a large, diverse group of people who don’t necessarily possess expert knowledge traditionally associated with effective problem solving. His view is contrary to popular, and corporate, assumptions that specialized experts in small deliberative groups are better able to make effective decisions. He proposes that narrow expertise is not fungible to other decision domains or contexts, and that expertise in “decision-making” is a poorly conceived notion. Indeed, large groups can be wiser than small cadres of experts even if they are not well informed or very rational. He proposes four key attributes that are necessary for effective large group collective wisdom: diversity of the group, independence of opinion and conclusions that is free of manipulative and corrupting influence, decentralization of the group, and bottom up processes that aggregate information. Surowiecki uses these attributes to show how collective decision making are effective is solving three distinct types of problems: cognitive, coordination, and cooperation.

Conditions for creating collective wisdom

  1. diversity of opinion (each person should have some private information, even if it's just an eccentric interpretation of the known facts).
  2. independence (people's opinions are not determined by the opinions of those around them).
  3. decentralization (people are able to specialize and draw on local knowledge).
  4. aggregation (some mechanism exists for turning private judgments into collective decision).

Types of problems best solved through aggregating collective wisdom

Cognitive: These are factual questions with definitive solutions in the present or in the future. Who will win the US Presidential election? How much does this hog weigh? Will an invasion of Cuba be successful or not? Which technology platform will succeed? Challenges to solving cognitive problems include group think, or herding, when members of a group receive and use undue influence on each other that prevents incorporating new, deviating, or controversial information into the decision making process. Information cascades occur when members of a group make decisions in sequence rather than simultaneously and undermines independent opinion and judgement.

Coordination: These are problems or challenges that involve structuring individual actions in way that they take a shared course of action. Individual actions are interdependent; what one person does depends and affects what everyone else will do. Coercion and authority are two ways of solving these problems but Surowiecki suggests that in liberal societies bottom up methods are more amenable to social norms. Examples include finding a common place to meet in a busy city (an example of a focal point or Schelling point), first come, first serve seating or cues, and flocking. Solutions to these problems resemble what Frederick Hayek called, “spontaneous order.”

Cooperation: These problems involve organizing individuals’ self-interested action in a way that creates mutual advantage. Examples of these problems include paying taxes and curbing pollution. A key to solving cooperation problems involves establishing and communicating trust. As Surowiecki states, to solve cooperation problems, a group or society needs to “ be able to trust those around them, because in the absence of trust the pursuit of myopic self-interest is the only strategy that makes sense.” Thus cooperation problems require groups to do more than in coordination problems.

Surowiecki concludes his book with a discussion of deliberative democracy and the role of deliberative polling to more accurately assess the views of American voters and engage them in civic life.