The Wisdom of Crowds

I've just finished reading The Wisdom of Crowds by James Surowiecki, a book that combined a number of my interests, namely social development, fresh business thinking, the stock market and behavioural economics. The basic premise of the book is suggested by the title - the fact that the best decisions are made by 'wise' crowds rather than one person, groups that are diverse in opinion, depolarised and have independent decentralised constituents make better decisions.

One of the bits that stuck out for me was around the IEM, something i've heard about before but never really taken an interest in. In short it's a future's market set up for academic research that focuses on the US Presidential Elections and various other smaller markets. It allow users to invest up to $500 in buying shares in the next US President. The IEM embodies the core of Surowiecki's premise; that a non-pressured group who are not saturated with the same potentially biased information can weigh up their own experiences, opinions and views of the problem (Who is more likely to win the Presidential election?) and make a judgement call on the value of that position within this market. The sum of all this individually held information is then collectively expressed in the snapshot of the price for each candidate ($0.62 for Obama & $0.39 for McCain at the time of writing).

There are many other interesting bits and pieces within the book but in terms of application to business it makes the point that businesses that pay lip service to decentralisation and the usefulness of local knowledge don't really benefit from it. A decentralised business structure that enables a flow of appropriate information from top to bottom should be crowned by a board that isn't run by an autocrat but one that really takes on board the views of others and allows dissenting voices. Nothing too revolutionary there you may think - people listening to other people is always good, that's true, but then ponder on the value that businesses now put on chasing the superhero CEO who can do it all? Why do they renumerate Chief Execs so well as if they hold all the answers whilst embarking on what can be an arduous series of feedback loops? Surowiecki's argument is that often listening to other views goes hand in hand with the process of encouraging consensus to a prescribed view anyway and that the whole pitch of the listening process is basically designed to reinforce the original view.

So in short let's not be too gloomy about what a group of people can do, the aggregation of knowledge nearly always outperforms the single smartest member.