Lesson 4: The wisdom of crowds

When we are confronted with a problem the normal question that comes to people’s minds is, “Who can I call on to help me out?”

Before you make that call its worth thinking about where experts actually add value. It is probably better to book a qualified plumber to repair a leaky pipe than dragging three random people off the street to help you. No doubt the same could be said for open heart surgery.

Experts are much less reliable at adding value when it comes to fields where the outcomes are diverse and subject to uncertainty. Business, investment and the economy for example are fields where the connection between cause and effect are far less clear.

Experts may also get stuck in old habits of thinking, unable or unwilling to use new techniques and adapt to a changing world. That point also applies to experts in fields as diverse as plumbing, surgery and business.

Groups can often solve problems much more efficiently and accurately than any single individual. The academic Francis Galton was one of the first to document this. Writing in 1907 he described a contest to guess the weight of an ox at an exhibition in Plymouth, England. Collecting a small entry fee from 787 participants he calculated the mean of the guesses — it was within 0.01% of the correct weight!

Other studies replicated these findings. From guessing the number of jellybeans in a jar to finding missing bombs, the wisdom of crowds surpassed the individual.

Three conditions must be in place to tap into the wisdom of crowds: diversity, aggregation and incentives. A diverse group of people reduces the collective error since over and under estimations should cancel each other out. Aggregation ensures that everyone’s information is accounted for. Finally, incentives encourage people to take part only when they think they have an insight.

Unchecked devotion to the wisdom of the crowds is folly! When one or more of the three conditions of the wisdom of crowds is unmet you should watch out. And the most important one to watch out for is diversity, which is also the most likely condition to fail.

Humans are social animals of article. We have a habit of following others and making decisions based on the actions of others. These so-called ‘information cascades’ explain booms and crashes in financial markets and why fashions come and go.

Extremes in markets and fashions tend to occur when everyone has the same opinion. The following quote from the book “Extraordinary Popular Delusions and the Madness of Crowds” describes how these extremes can occur — when diversity, the vital condition for the wisdom of crowds is missing. “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one.”

How to use the wisdom of the crowds to make better decisions

  • Match the problem to the solution: Experts do a good job in some settings, but not all. Sometimes it’s a good idea to supplement expert views with other approaches like asking the view of a diverse group.
  • Seek diversity: Get opinions from people that know a little about a lot of things. These types of people are not married to a single explanation for complex problems. They can also spot and incorporate learnings from other unrelated subjects.

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