“The Wisdom of the Crowds: Why the Many Are Smarter than the Few and How Collective Wisdom Shapes Business, Societies, Economies, Societies and Nations”
by James Surowiecki

Thesis: Under the right conditions, groups are remarkably intelligent and we often smarter than the smartest people in them.

	Areas where the crowds seem to be fairly clever: Cognition, coordination, and cooperation.
	Needs for the crowd to be wise: Diversity, independence, and decentralization.

Cognition -- The crowd is amazingly right on things where you can measure

“Who wants to be a millionaire?”

Poll the audience-91%, Calling someone-64%

Francis Galton and the OX -- 787 guesses. Average was 1197 lbs. Ox weighed 1198. That is better than any individual guess.

The scorpion (a nuclear submarine) disappears somewhere inside a 20 mile circle. Navy assembles a large diverse team that makes guesses of location of sub. Their average was off by 200 yards.

Challenger explosion

Morton Thiokol’s stock down 12% other three companies about the same.

Point spreads adjust based on betting with 50% on each side.

Mirage final line is the greatest predictor of athletic outcomes.

Google- most popular search engine. Relies on how many hits a page receives (that is relevant to a search) to determine the best web page for each topic

Decision markets – Iowa Electronic Markets

People buy/sell futures, “contracts” based on how one thinks a candidate will do à consistently performs better than polls of norm

Political analysis market -- people would bet on a variety of outcomes in the middle (assassinations, violence, revolutions) -- Senator Wyden helped kill it

Theory: Ask 100 people a question and the answer will be better than its smartest member – collectively humanity can make sense of its world in a way better than any 1 individual, “it’s as if we’ve been programmed to be collectively smart”

Coordination problems – how does the herd coordinate its actions so that it doesn’t run into each other in a crowded mall?

To solve it requires the individual to discern not only what they believe is the right answer, but also what other people think is the right answer, because what each person does affects and depends on what everyone else will do (action can still be based on self interest)

Example: 4-way stops in LO

how do we do it? culture offer hints of how other people will act--first come, first serve basis in public spaces

More examples: facing one way in an elevator

-get in line with first person getting in front

(it’s also the responsibility of the person directly behind a cutter to object)

How do free markets do this?

How can knowing only partial knowledge and limited capability get resources to the right price at the right price?

OJ ready for me at every time I go to the grocery store even though I gave the owner no notice – how did the OJ factory know to make it, how did the farmer know to grow it?

Perfect, total information not required for rational, small decisions to create a fully functional comprehension system

Cooperation (How does the herd do things that help the collective but may not benefit the individual all that much)

To solve cooperation problems, individuals need to adapt a wider definition of self interest to benefit themselves (and everyone else) in the long term à requires trust of other or else only myopic self interest makes sense (in a strictly rational sense it would seem that every individual would be a “free rider,” but that would rapidly destroy society and cast us into darkness and we’d look like Lakeridge)

A sense of fairness is deeply rooted (in other words there should be a reasonable relationship between accomplishment and reward)

Ultimatum game – there are $10 – the proposer can propose any division of the funds and the responder can only accept it or reject the entire proposal (and neither party gets anything)- rational outcome: $9 for proposer, $1 for responder – but the most likely offer is $5 and offers below $2 are usually rejected (exception was when the proposer was somehow identified as having earned that position)

Capuchin monkeys and grapes/cucumbers

Richard Grasso and the $139 million pay day

Why?? – “strong reciprocity” a willingness to punish bad behavior (or reward good behaviour) even when you get no material benefit from doing so -- so individual reinforce fairness for intrinsic reasons – leads to collectively just outcomes

In addition, people have learned prosocial behavior ( such as tipping) are games in which everyone can end up gaining

Capitalism encourages a healthy level of trust in the reliability and fairness of transactions – otherwise business slows by suspicion and caution

- this trust becomes generalized as business people realize in the long run that honesty is good business

Exceptions: you betcha!

- But lawsuits aren’t that common

- There are enforcement mechanisms for violators like Enron and Arthur Anderson

Taxpayers are the ultimate free-rider problem because the chance of being caught is low and so it becomes rational to cheat on taxes

So why do most people pay their taxes ?? (at a rate higher than most countries, including Europe) people feel that they should pay their share so long as those who do cheat are punished – so we have a positive feedback loop where tax paying creates a small group of tax cheats who can then be caught and punished, reaffirming the value that it is correct the pay your taxes

Requirements of a Good Group (ie why a drunken mob of college kids doesn’t sit down and discuss philosophy, but instead tends to break things)

Cognitive diversity

	adds perspective
	electorates and markets are diverse because anyone can enter them
	groups are more effective if every one not just “smart” people, instead a variety of skills, attitudes can benefit a group
	groups that are too alike find it harder to keep learning because each member brings less and less new information to the table
	the value of individual exposure is overrated and expertise tends to be narrowed, not good at prediction of forecasting

between 84-99 almost 90% of mutual fund managers underperformed the market – studies have determined that non-psychologists are better at predicting people’s behavior than psychologists – medical pathologists (study of tissue?) presented with the same evidence disagree on a diagnosis 50% of the time

-- small groups of experts are subjects to “groupthink”

Bay of pigs, Japanese attack on Pearl Harbor

diversity fight that tendency

Independence

Errors aren’t self reinforcing if decision making isn’t independent

§ Independent individuals will have access to new info, interpretation, analysis, intuition

	It is possible to become individually smart (by showing info of analysis with each other) but collectively dumb
	Sky-watching experiment: as crowd grows assumption becomes it must be correct (since the collective is often correct) – but if too many people do that the crowd loses cognitive diversity and gets dumb

§ Information cascades à initial movement by a herd will give others à momentum will pick up to the point that personal info and analysis is ignored because of the assumption the herd know better. – (May be correct: garbage day)

§ So why isn’t this always the death of the wisdom of the crowd à because most people are overconfident à means they are willing to buck conventional wisdom – can be bad for individual, but good for collective wisdom (Beta tape v VHS)

Decentralization

After 9/11 a great deal of criticism that intelligence gathering was fragmented (so the various agencies couldn’t create a composite picture) so decentralization is bad?

Linux – people contribute bits and pieces to the operating code

But there needs to be some sort of aggregation mechanism – a way of channeling the group decision making into outcome (like elections or stock market prices) – that may have been the problem with pre 9/11 intelligence, there was lots of intelligence but no aggregate agency to tap into collective wisdom

decentralization is fed by (and fosters) specialization of labor, interest, attention, whatever -- harnesses tacit knowledge (that is specific to a particular job location, experience, strength) – encourages independence of specialization on while still allowing people to coordinate where there was weakness – sometimes valuable info never gets fully disseminated

So what does this say about Democracy ?

Do voters reflect the “public interest”? – a good question once we can figure out what the “public interest” is – otherwise a meaningless standard to attempt

Problem: Public choice theory – people vote as a reflection of self interest (for example: supporting the industry they work for)

But why vote at all?

Voting defies a rational explanation based on self interest

But might the votes cast still reflect self interest?

Not much interest in increasing taxes on the wealthy even though most people are not wealthy

Ideology is still a better predictor of voting behavior (conservatives with no insurance vote against universal health insurance, while liberals with insurance will support it)

Problem: the public doesn’t seem all that informed (in 2003 ½ of all Americans did not know Bush cut taxes, during the Cold War ½ of all Americans thought that the USSR was part of NATO)

But voters are not quizzed about current events, they are asked to select the candidate who will make the right decisions

Evidence does indicate that voters do pay attention to issues that affect them and they are inundated with information ranging from gas prices to local casualties in Iraq