THE WISDOM OF CROWDS

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THE WISDOM OF CROWDS - page 1
THE WISDOM OF CROWDS WHY THE AND MANY ARE SMARTER WISDOM THAN SHAPES AND THE FEW HOW COLLECTIVE ECONOMIES, BUSINESS, SOCIETIES, NATIONS JAMES SuRowIEcKi I) 0 U B L E U A Y New York London Toronro Sydney Auckknd
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THE WISDOM OF CROWDS - page 2
S PUBLiSHED BY DOUBLEDAY a division of Random House, Inc. DOUBLEDAY and the portrayal of an anchor with a dolphin are registered trademarks of Random House, Inc. Some of the material in this book was originally published in different form in The New Yorker. Library of Congress Cataloging-in-Publication Data Surowiecki, James, 1967— The wisdom of crowds why the many are smarter than the few and how collective wisdom shapes business, economies, societies, and nations / James Surowiecki. p. cm. Includes bibliographical references. I. Consensus (Social sciences) 2. Common good. I. Title. JC328.2.S87 2003 303.3’8—dc22 2003070095 ISBN 0-385-50386-5 Copyright © 2004 by James Surowiecki All Rights Reserved PRINTED IN THE UNITED STATES OF AMERICA June 2004 5 7 9 10 8 6 4
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INTRODUCTION one div ii) the hill üí I 9O~,the British scientist francs Galtorl leh his borne iii I lie wtt’n of Pl~ iTlOtitO Bad head cI for a COtintfl’ fair. ( ;alton was eighlv-h\’e years old anti beginning to feel uk age. hIJI he was still brimming wIth 11)5’ curiosity taut hao won him renown —-anti DIII I)YletV for his ivork DI) slatjsl ics and I he science of llcreditv. Anti OIi [hal parlicular day. \~hai(alton was curious ,lI)OtIt \Vas ii ye stock. (Jalton’s destination was the annual \~st of Englanc: I at Stock and Ponil iv I :xhihition a regional fair where the local farm- ers and townspeople gathered U. appraist. (lie quaiit~ of each others cattle, sheep, chicke ns, horse arId pigs. \\hadering t hrotlgh rows td stalls examining isnrkhorses and prit.e hogs may Seem 10 have been a sirange way for a scientist les1,et-iall~an elderly one) IC) spend an altt’rI)OOn, 1)111 there was a certain logic 10 is.. (~ dlton was a man obsessed \~ two I hiogs: the measurement of physical ith and mental qualities, and Urceding. And whai. alter all is a live- stock shots bum a big showcase br the effect:; of good aI id bad breeding? l3reetling mattered to Galton because lie believed that on) a i cry Few penile had the characteris~mcsnecessary to keep socielies [ICiltin: I le had deo aeti much ot his career to measuring those characteristics n fact, in order to prove thai tIM’ VaSl IbflhiorItV of -
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XII INYflODUCYION people did not have them. At the International Exhibition of 1884 in London, for instance, he set up an “Anthropometric Laborator)ç” where he used devices of his own making to test exhibition-goers on, among other things, their “Keenness of Sight and of Hearing, Colour Sense, Judgment of Eye, [and] Reaction Time.” His exper- iments left him with little faith in the intelligence of the average person, “the stupidity and wrong-headedness of many men and women being so great as to be scarcely credible.” Only if power and control stayed in the hands of the select, well-bred fet~ Galton be- lieved, could a society remain healthy and strong. As he walked through the exhibition that day, Galton came acrossa weight-judging competition. A fat ox had been selected and placed on display, and members ofa gatheringcrowd were lining up to place wagers on theweight of theox. (Or rathe~ were plac- they big wagers on what the weight ofthe ox would be after it had been “slaughtered and dressed.”) For sixpence, you could buy a stamped and numbered ticket, where you filled in your name,your address, and your estimate. The best guesses would receive prizes. Eight hundred people tried their luck. They were a diverse lot. Many of them were butchers and farmers, who were presumably ex- pert atJudging the weight oflivestock, but there were also quite a few people who had, as it were, no insider knowledge of cattle. “Many non-experts competed,” Galton wrote later in the scientific journal Nature, “like those clerks and others who have no expert knowledge of hones, but who bet on races, guided by newspapers; friends, and their own fancies.” The analogy to a democraqc in which people of radically different abilities and interests each get one vote, had suggested itself to Galton immediately “The average competitor was probably as well fitted for making a just estimate of the dressed weight of the ox, as an average voter is ofjudging the merits ofmost political issues on which he votes,” he wrote. Gakon was interested in figuring out what the “average vote? was capable of because he wanted to prove that the average voter was capable of venj little. So he turned the competition into an im-
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)PITRODUCTION XIII promptu experiment. When the contest was over and the prizes had been awarded, Galton borrowed the tickets from the organiz- ers and ran a series of statistical tests on them. Galton arranged the guesses (which totaled 787 in all, after he had to discard thirteen because they were illegible) in order from highest to lowest and graphed them to see if they would form a bell curve. Then, among other things, he added all the contestants’ estimates, and calcu- lated the mean of the group’s guesses. That number represented, you could say, thecollective wisdom ofthe Plymouth crowd. If the crowd were a single person, that was how much it would have guessed the ox weighed. Galton undoubtedly thought that the average guess of the group would be way off the mark. After all, mix a few very smart people with some mediocre people and a lot ofdumb people, and it seems likely you’d end up with a dumb answet But Galton was wrong. The crowd had guessed that the ox, after it had been slaughtered and dressed, would weigh 1,197 pounds. After it had been slaughtered and dressed, the ox weighed 1,1% pounds. In other words, the crowd~sudgment was essentially perfect. Perhaps j breeding did not mean so much after all. Calton wrote latet “The result seems more creditable to the trustworthinessofa democratic judgment than might have been expected.” That was, to say the least, an understatement. II What Francis Galton stumbled on that day in Plymouth was the simple, but powerful, truth that is at the heart ofthis book. under the right circumstances, groups are remarkably intelligent, and are often smarter than the smartest people in them. Groups do not need to be dominated by exceptionally intelligent people in order to be smart. Even if most of the people within a group are not espe- cially welJ-info~ed rational, it can still reach a collectively wise or
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XIV INTRODUCTION decision. This is a good thing, since human beings are not perfectly designed decision makers. Instead, we are what the economist Her- bert Simon called “houndedly rational.” We generally have less in- formation than we’d like. We have limited foresight into the future. Most of us lack the ability—and the desire—to make sophisticated cost-benefit calculations. Instead of insisting on finding the best possible decision, we will often accept one that seems good enough. And we often let emotion affect our judgment. Yet despite all these limitations, when our imperfect judgments are aggregated in the right way our collective intelligence is often excellent. This intelligence, or what I’ll call the wisdom of crowds,” is at work in the world in many different guises. It’s the reason the Inter- net search engine Google can scan a billion Web pages and find the one page that has the exact piece of information you were looking for It’s the reason it’s so hard to make money betting on NFL games, and it helps explain why for the past fifteen years, a few hundred amateur traders in the middle of iowa have done a better job of predicting election results than Gallup polls have. The wis- dom of crowds has something to tell us about why the stock market works (and about why every so often, it stops working). ‘The idea of collective intelligence helps explain why when you go to the con- venience store in search of milk at two in the morning, there is a carton of milk waiting there for you, and it even tells us something important about why people pay their taxes and help coach Little League. It’s essential to good science. And it has the potential to make a profound difference in the way companies do business. in one sense, this book tries to describe the world as it is, looking at things that at first glance may not seem similar but that are ultimately very much alike. But this book is also about the world as it might be. One of the striking things about the wisdom of crowds is that even though its effects are all around us, it’s easy to miss, and, even when it’s seen, it can he hard to accept. Most of us, whether as voters or investors or consumers or managers, be- lieve that valuable knowledge is concentrated in a very few hands
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INTRODUCTION XV (or, rather, in a very few heads). We assume that the key to solving problems or making good decisions is finding that one right person who will have the answer. Even when we see a large crowd of peo- ple, many of them not especially well-informed, do something amazing like, say predict the outcomes of horse races, we are more likely to attribute that success to a few smart people in the crowd than to the crowd itself. As sociologists Jack B. SoIl and Richard Larrick put it, we feel the need to “chase the expert.” The argument of this book is that chasing the expert is a mistake, and a costly one at that. We should stop hunting and ask the crowd (which, of course, includes the geniuses as well as everyone else) instead. Chances are, it knows. III Charles Mackay would have scoffed at the idea that a crowd of people could know anything at all. Mackay was the Scottish jour- nalist who, in 1841, published Extraordinaiy Popular Delusions and the Madness of Crowds, an endlessly entertaining chronicle of mass manias and collective follies, to which the title of my book pays homage. For Mackay crowds were never wise. They were never even reasonable. Collective judgments were doomed to be ex- treme. “Men, it has been well said, think in herds,” he wrote. “It will he seen that they go mad in herds, while they only recover their senses slowly and one by one.” Mackay’s take on collective mad- ness is not an unusual one. In the popular imagination, groups tend to make people either dumb or crazy or both. The speculator Bernard Baruch, for instance, famously said: “Anyone taken as an individual is tolerably sensible and reasonable—---as a member of a crowd, he at once becomes a blockhead.” Henry David Thoreau lamented: “The mass never comes up to the standard of its best member, but on the contrary degrades itself to a level with the low- est.” Friedrich Nietzsche wrote, “Madness is the exception in mdi-
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XVI INTRODUCTION viduals but the rule in groups,” while the English historian Thomas Carlyle put it succinctly: “1 do not believe in the collective wisdom of individual ignorance.” Perhaps the most severe critic of the stupidity of groups was the French writer Gustave Le Eon, who in 1895 published the polemical classic The Crowd: A Study of the Popular Mind. Le Eon was appalled by the rise of democracy in the West in the nine- teenth centur)ç and dismayed by the idea that ordinary people had come to wield political and cultural power. But his disdain for groups went deeper than that. A crowd, Le Eon argued, was more than just the sum of its members. Instead, it was a kind of inde- pendent organism. ft had an identity and a will of its own, and it often acted in ways that no one within the crowd intended. When the crowd did act, Le Eon argued, it invariably acted foolishly. A crowd might be brave or cowardly or cruel, but it could never be smart. As he wrote, “In crowds it is stupidity and not mother wit that is accumulated.” Crowds “can never accomplish acts demand- ing a high degree of intelligence,” and they are “always intellectu- ally inferior to the isolated individual.” Strikingl)c for Le Eon, the idea of“the crowd” included not just obvious examples of collective wildness, like lynch mobs or rioters. It also included just about any kind of group that could make decisions. So Le Eon lambasted juries, which “deliver verdicts ofwhich each individual juror would disapprove.” Parliaments, he argued, adopt laws that each of theft members would normally reject. In fact, if you assembled smart people who were specialists in a host of different fields and asked them to “make decisions affecting matters ofgeneral interest,” the decisions they would reach would be no better, on the whole, than those “adopted by a gathering of imbeciles.” Over the course of this book I Ibilow Le Ron’s lead in giving the words “group” and “crowd” broad definitions, using thewords to refer to everything from game-show audiences tomultibillion-dollar corporations to a crowd of sports gamblers. Some of the groups in
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INtRODUCTiON XVII this book, like the management teams in Chapter 9. are tightly or- ganized and very much aware of their identities as groups. Other crowds, like the herds of cars caught in traffic that I write about in Chapter 7, have no formal organization at all. And still others, like the stock market, exist mainly as an ever-changing collection of numbers and dollars. These groups are all different, but they have in common the ability to act collectively to make decisions and solve prohlems—even if the people in the groups aren’t always aware that’s what they’re doing. And what is demonstrahly true of some of these groups—namely, that they are smart and good at problem solving—is potentially true of most, if not all, of them. In that sense, Gustave Le l3on had things exactly backward. if you put together a big enough and diverse enough group of people and ask them to “make decisions affecting matters of general interest,” that group’s decisions will, over time, be “intellectually (superiorj to the isolated individual,” no matter how smart or well-informed he is. ‘V Judging the weight of an ox is hardly a complex task. But, as I sug- gested above, collective intelligence can be brought to bear on a wide variety of problems, and complexity is no bar. in this book, I concentrate on three kinds of problems. The first are \.vhat I’ll call cognition problems. ‘Fhese are problems that have or will have de- finitive solutions. For example, “Who will win the Super Bowl this year?” and ‘How many copies of this new ink-jet rinter will we sell in the next three months?” are cognition problems. So, too, is “How likely is it that this drug will he approved by the FDA?” Questions to which there may not he a single right answer, but to which some answers are certainly better than others—such as, “What would he the best place to build this new public swimming pool?”—are cog- nition problems, too. The second kind of problem is what’s usually called a coordi-
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XVIII INTRODUCTION nation problem. Coordination problems require members of a group (market, subway riders, college students looking for a party) to figure out how to coordinate their behavior with each other, knowing that everyone else is trying to do the same. How do buy- ers and sellers find each other and trade at a fair price? How do companies organize their operations? How can you drive safely in heavy traffic? These are all problems of coordination. The final kind of problem is a cooperation problem. As their name suggests, cooperation problems involve the challenge of get- ting self-interested, distrustful people to work together, even when narrow self-interest would seem to dictate that no individual should take part. Paying taxes, dealing with pollution, and agreeing on definitions of what counts as reasonable pay are all examples of cooperation problems. A word about structure. The first half of this book is, you might say, theory although leavened by practical examples. There’s a chapter for each of the three problems (cognition, coordination, and cooperation), and there are chapters covering the conditions that are necessary for the crowd to he wise: diversity, indepen- dence, and a particular kind of decentralization. The first half be- gins with the wisdom of crowds, and then explores the three conditions that make it possible, before moving on to deal with co- ordination and cooperation. The second part of the book consists of what are essentially case studies. Each of the chapters is devoted to a different way of organizing people toward a common (or at least loosely common) goal, and each chapter is about the way collective intelligence ei- ther flourishes or flounders. In the chapter about corporations, for instance, the tension is between a system in which only a few peo- ple exercise power and a system in which many have a voice. The chapter about markets starts with the question of whether markets can be collectively intelligent, and ends with a look at the dynam- ics of a stock-market bubble. There are many stories in this book of groups making bad
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