The Wisdom of Crowds James Surowiecki Themes • Groups do not need to be dominated by experts or unusually smart people to come up with wise decisions – Bounded rationality– what seems good enough based on current information – Diversity adds to the amount of information available • Chasing the expert may be a mistake More themes • Groups need rules to maintain order • Groups benefit from free communication • Groups need diversity • Best decisions come from disagreement and contest– not consensus or compromise • Each member needs to be as independent as possible We are programmed to be collectively smart • Who Wants to be a Millionaire– the audience picks the right answer 91% • The group tends to select the optimal answer • The average of group guesses is well over 90% accurate in a long series of tests – Google uses this to weight the importance of pages on the Internet. That is why their search engine works so well How can we leverage this insight? • Use decision markets to increase diversity of insights and generate better policies – Quick way of transforming diverse opinions into a single collective judgment – Stock market, voting, point spreads, futures contracts are other mechanisms Value of diversity • A diverse market place allows customers to winnow out the best alternative solutions – Requires a good way to share information – Requires independence • Bees – Uncover all alternatives then choose among them • Adds new perspectives and reduces group think • Important in small groups and formal organizations – Lack of diversity inhibits learning Why not rely on experts? • Intelligence is narrow and is not fungible • Experts are poor at calibrating their judgments – Knowing and knowing that you know are two different skills – Information that is counter to conventional wisdom is often ignored or rationalized, reinforcing belief that you are right Leveraging Diversity • It is easier to buck the tide of conventional wisdom if you have an ally in the group– even if they have a different rationale • Independence prevents correlation of mistakes and brings in new data Impediments to Diversity • Learning is a social process • Tendency to think there is value simply because the group is doing it • It is harder to come up with an explanation about why you disagree – Risk aversion– following the herd is safest • Information cascades can inhibit access to data when decisions are made sequentially – Can create bubbles How can we become more diverse? • Decentralization • Coordination • Prosocial behavior Decentralization • Decision can be based on local and specific knowledge • Encourages independence and specialization while still supporting information sharing and coordination – Need to ensure SHARING happens • Information AND judgments – Need way to sort through the info • Aggregating different opinions and indexing them – Goal is to be globally and collectively useful while still retaining specific and local character Internal Markets • FutureMAP – DARPA program to allow analysts from different agencies to buy and sell futures contracts based on their expectations about what might happen in the Middle East – Policy Analysis Market attempted to provide intelligence on Middle East • Killed by Congress– public also opposed • Replaced by Net Exchange that used info from general public Getting people to coordinate • How can people voluntarily make their actions fit together efficiently and effectively? – Focal points upon which expectations can converge • Schelling points represent shared benefits • Grand Central at high noon – Cultural norms and conventions • Subway • Pricing of movie tickets – Internalized with external sanctions • Queue jumping – Spontaneous order • Grocery store selection Role of society in cooperation • Impose broader definition of self interest • Ensure support of public goods while reducing the free rider effect – Incentive to let others do the work – If all are free riders, nothing gets done • Ensure concept of fairness and relationship between accomplishment and reward – Trading game – Monkeys • Cooperate with those we know and with strangers – There are benefits of being trusting and trustworthy • Allows trade to flourish • Internal discipline drives fair dealing • Government role in protecting property rights • Contingent consenters and taxes Diversity and Traffic Jams • Diversity impedes coherent flow • To move at optimal pace, must move as a solid block • Would require like driving styles/destinations to be placed together • Standardization of flow, ingress, exit • Congestion pricing Cooperation in science • Cooperation and information sharing across independent labs help solve the SARS mystery within a month – Specialized analytical skills plus globally shared results and data – Good on interdisciplinary problems – Gift economy – Collective wisdom of the community winnows out bad hypotheses = meritocracy Making committees work • Decisions of small groups ubiquitous and consequential • The influence of the people in the group on each other’s judgment is inescapable – More volatile and extreme – Possibility of making better decisions – Also possibility of subtracting value • Must have open minds • Must work from evidence to conclusion • Must gather evidence • Must freely discuss the evidence– debate and minority opinions • Must not limit the time spent • Must not emphasize consensus over dissent • Must have leaders that encourage input from all and full airing of the issues within a free flowing discussion Issues • Order of speaking may create a framing problem • Talkativeness is not equal to knowledge – High status people are more talkative – Polarization is caused by social comparison • Nonpolarized groups make better decisions • Groups must be allowed to make decisions not just be advisory Companies and collective wisdom • Top down nature of organizations cause leadership to be isolated from other points of view • Principal/agent problem • Layers impede information flow • Must be honest about expectations and performance assessments • Conflict is ok • Pay based on output or meeting targets? • Incentive to seek new information • Silos • Ownership/responsibility/control • Internal markets Democracy • Given enough information and the opportunity to consult with peers, people can understand complex issues and make meaningful choices • “Americans are increasingly isolated from the political system, public debate is becoming coarser and less informative, and the idea of public good is being eclipsed by our worship of private interest” What is at work? • Motivations of voters and politicians – Simple fact that you voted shows you are not being guided by true self interest – There is no correlation between self interest and voting behavior • Democracy needs the constant flow of information it gets from votes • Per Schumpeter, to different individuals the common good is bound to mean different things – Dealing with fundamental cooperation and coordination problems • How do we live together? • How can this work to our mutual benefit? One last thing • It doesn’t matter when an individual makes a mistake because as long as the group is diverse and independent, the mistakes cancel out and you are left with the knowledge of the group Questions???
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