The Wisdom of Crowds The Wisdom of Crowds James by yurtgc548


									The Wisdom of Crowds

    James Surowiecki
• 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
• 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
• 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
• 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
  – Lack of diversity inhibits learning
     Why not rely on experts?
• Intelligence is narrow and is not fungible
• Experts are poor at calibrating their
  – 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
• Decentralization
• Coordination
• Prosocial behavior
• Decision can be based on local and specific
• Encourages independence and specialization
  while still supporting information sharing and
  – 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
• Order of speaking may create a framing
• 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
• Conflict is ok
• Pay based on output or meeting targets?
• Incentive to seek new information
• Silos
• Ownership/responsibility/control
• Internal markets
• 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
       • 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

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