Book Author: James Surowiecki
Book Review by : S S George
Director, ICMR (IBS Center for Management Research)
James Surowiecki, Iowa Electronic Markets, IEM, futures contracts, Hollywood Stock Exchange, HSX, forecasting, Policy Analysis Market, 9/11 attacks
The Wisdom of Crowds is a book that will not go down well with admirers of the heroic style of leadership. This is a group of people who believe that it takes extraordinary people
- heroes - to assume successful leadership roles. Even people who do not look to heroes to solve their problems probably believe that, in any given group, when faced with a problem, the more intelligent people will come up with the better solutions. Add to this the general dislike
- much of it deserved - of mob behavior. So, anyone who claims that the crowd is often wiser that the smartest individual in the crowd, is certainly flying in the face of conventional wisdom. But James Surowiecki, a staff writer at the New Yorker, does just that in this book, and backs up his claim with descriptions of numerous instances when the group proved to be smarter that the smartest individual in the group.
After the competition, Galton collected the used tickets, and analyzed the guesses of the crowd. He was astonished by the results. After the ox had been slaughtered and dressed, it weighed 1,198 pounds. And the average of the crowd's guesses? 1197 pounds. The crowd's guess was thus amazingly accurate. This result, where the crowd's guess is better than the estimate of even the most expert individual in the crowd, has been replicated in numerous experiments.
In the book, Surowiecki talks of three kinds of problems - cognition problems, similar to the task of estimating the weight of the ox; coordination problems, where a large number of people must coordinate their actions, as in the case of buying and selling stocks; and cooperation problems, where people must work together to achieve results that are good for the group but may not have any benefit for the individuals involved, such as in the payment of income and other taxes. All these problems, according to author, can benefit from the wisdom of crowds - though not in the same manner.
However, as we all know, crowds are not always wise. The herd mentality that drives stock market bubbles, or the mob behavior that destroys property and takes lives, are probably more familiar to us than the concept of a wise crowd. For crowds to arrive at the best decisions, according to Surowiecki, there are several preconditions. Issues such as the size and manageability of a group are important, but more than these, the two critical factors that influence the intelligence of a group are the diversity and the independence of its constituent members. This is because, according to the author, the best decisions are arrived at not through compromise or consensus, but through disagreement and contest.
When the necessary conditions are not present, the crowd becomes less than wise. In fact, it then assumes more familiar forms - ranging from the brainless committee to the rampaging mob. And, as demonstrated by the abundance of poor judgment exhibited by groups all around us, this is something that happens often.
The author describes several ways in which the intelligence of the crowd can be put to good use. One example is the idea of decision markets such as the Iowa Electronic Markets (IEMs). Established in 1988 by the College of Business at the University of Iowa, the IEM offers individuals several markets where they can trade 'futures contracts,' based on their assessment of how individual candidates will perform in elections.