Book Review: The Wisdom of Crowds

Author: James Surowiecki
Publisher: Doubleday
Year Published: 2004
Rating:
Buy From Amazon.com

For any particular question, which do you think is more likely to give you a better answer – ask an expert or randomly poll a large, diverse group of people? Conventional wisdom says the expert. James Surowiecki argues for the group in his book, The Wisdom of Crowds.

The book is divided into two parts. Part 1 explains Surowiecki’s theory, addresses specific types of problems and how individuals v. groups solve them, and details what conditions are necessary for the crowd to offer a wise answer. Part 2 provides a number of case studies describing how different people have come together to solve a particular problem including why London started charging a congestion fee to drive downtown, why scientists work collaborate rather than work in isolated groups, why small committees tend to emphasize consensus over dissent and how the lack of debate can lead to shortsightedness and poor decision making, and the behavioral economics of bubbles in the stock market.

Surowiecki begins his book with the popular game show, Who Wants To Be Millionaire, as an example of the wisdom of crowds at its best. During the show, if a contestant was stumped, she had the option of calling an expert she picked before the show or polling the audience for the answer. Statistically, “experts” got the correct answer 65% of the time. The audience collectively picked the right answer 91% of the time. While those numbers wouldn’t stand up to scientific scrutiny, there are a number of scientific studies that show similar results.

According to Surowiecki, there are 4 characteristics that make up wise crowds

diversity of opinion (each person should have some private information, even if it’s just an eccentric interpretation of the known facts), independence (people’s opinions are not determined by the opinions of those around them), decentralization (people are able to specialize and draw on local knowledge), and aggregation (some mechanism exists for turning private judgments into a collective decision.) If a group satisfies those conditions, its judgment is likely to be accurate.

He uses the stock market’s reaction during the wake of the Challenger explosion of 1986. Within a half hour of the explosion, the stocks of the four major contractors the participated in the launch were down, yet by the end of the day, all but Thiokol, who built the solid-fuel booster rocket, had almost recovered. Investors had decided Thiokol was responsible, though there were no public declarations that Thiokol had anything to do with the disaster. Six months later, it turned out that the market had been right. Surowiecki theorizes that the market had reacted not to “Who was responsible for the Challenger disaster?” which didn’t have an answer but “How much less are these four companies worth now that the Challenger has exploded?” which did have an objectionably correct answer. Those who were trading that day had some sense of what that answer might be, whereas if you had asked a bunch of children to buy and sell stocks, chances are, they wouldn’t have been able to single out Thiokol. As he says,

If you ask a large enough group of diverse, independent people to make a prediction or estimate a probability, and then average those estimates the errors each of them makes in coming up with an answer will cancel themselves out. Each person’s guess, you might say, has two components: information and error. Subtract the error, and you’re left with the information.

The scary thing is that a few studies have shown that experts repeatedly overestimate how much they know about their areas of expertise. For instance, one study found that pathologists presented with the same evidence would offer a different opinion half the time. Another found that foreign exchange traders overestimate the accuracy of their exchange rate predictions 70% of the time. Surowiecki concludes that

this doesn’t mean that well-informed, sophisticated analysts are of no use in making good decisions. (And it certainly doesn’t mean that you want crowds of amateurs trying to collectively perform surgery or fly planes.) It does mean that however well-informed and sophisticated an expert is, his advice and predictions should be pooled with those of others to get the most out of him.

According to Surowiecki, where most people go wrong is in seeking out the smartest person they can find. While there will always be a handful of genuine experts like Warren Buffet, there are far more people who have just gotten lucky or are good at marketing themselves. Instead of seeking out that one savior for your company, it’s better to pick pieces of advice from a number of experts. To be clear, he’s not arguing about the value of expertise, he’s simply saying that a group of experts or even a group of experts and amateurs have the potential to make a better decision than a single decision maker. One person can have biases and blind spots that groups are more likely to notice and call out.

In addition, for a group decision to be successful, each person must act independently of others.

Independence is important to intelligent decision making for two reasons. First, it keeps the mistakes that people make from becoming correlated. Errors in individual judgment won’t wreck the group’s collective judgment as long as those errors aren’t systematically pointing in the same direction. One of the quickest ways to make people’s judgments systematically biased is to make them dependent on each other for information. Second, independent individuals are more likely to have new information rather than the same old data everyone is already familiar with.

The book also doesn’t shy away from the problem that groups do make bad decisions. Surowiecki looks at groups that make poor or mediocre decisions and theorizes why they fall outside his framework for good group decision making. Often, big groups are great for solving certain types of problems but can be unmanageable and have communication breakdowns. In contrast, small groups can be more efficient, but might not have the diversity required to hammer out the best solution.

If you can’t get enough of books like Freakonomics or Malcolm Gladwell’s writings which challenge conventional thinking with witty, informative prose, this book is for you. While it would have been nice if Surowiecki could have provided more evidence for his conclusions and would have drawn deeper parallels between the theory and the case studies he provides, it is an interesting read, nonetheless.

Random Posts