The Wisdom of Crowds
Encyclopedia
The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations, published in 2004, is a book written by James Surowiecki
about the aggregation of information in groups, resulting in decisions that, he argues, are often better than could have been made by any single member of the group. The book presents numerous case studies and anecdote
s to illustrate its argument, and touches on several fields, primarily economics
and psychology
.
The opening anecdote relates Francis Galton
's surprise that the crowd at a county fair accurately guessed the weight of an ox
when their individual guesses were averaged (the average was closer to the ox's true butchered weight than the estimates of most crowd members, and also closer than any of the separate estimates made by cattle experts).
The book relates to diverse collections of independently-deciding individuals, rather than crowd psychology
as traditionally understood. Its central thesis, that a diverse collection of independently-deciding individuals is likely to make certain types of decisions and predictions better than individuals or even experts, draws many parallels with statistical sampling
, but there is little overt discussion of statistics in the book.
Its title is an allusion to Charles Mackay
's Extraordinary Popular Delusions and the Madness of Crowds
, published in 1841.
. According to Surowiecki, these key criteria separate wise crowds from irrational ones:
Based on Surowiecki’s book, Oinas-Kukkonen captures the wisdom of crowds approach with the following eight conjectures:
) in which the crowd produces very bad judgment, and argues that in these types of situations their cognition or cooperation failed because (in one way or another) the members of the crowd were too conscious of the opinions of others and began to emulate each other and conform rather than think differently. Although he gives experimental details of crowds collectively swayed by a persuasive speaker, he says that the main reason that groups of people intellectually conform is that the system for making decisions has a systematic flaw.
Surowiecki asserts that what happens when the decision making
environment is not set up to accept the crowd, is that the benefits of individual judgments and private information
are lost and that the crowd can only do as well as its smartest member, rather than perform better (as he shows is otherwise possible). Detailed case histories of such failures include:
He recommends:
Tim O’Reilly and others also discuss the success of Google
, wiki
s, blog
ging, and Web 2.0
in the context of the wisdom of crowds.
to get off the ground. He points to the success of public and internal corporate markets as evidence that a collection of people with varying points of view but the same motivation (to make a good guess) can produce an accurate aggregate prediction. According to Surowiecki, the aggregate predictions have been shown to be more reliable than the output of any think tank
. He advocates extensions of the existing futures markets even into areas such as terrorist
activity and prediction markets within companies.
To illustrate this thesis, he says that his publisher is able to publish a more compelling output by relying on individual authors under one-off contracts bringing book ideas to them. In this way they are able to tap into the wisdom of a much larger crowd than would be possible with an in-house writing team.
Will Hutton
has argued that Surowiecki's analysis applies to value judgments as well as factual issues, with crowd decisions that "emerge of our own aggregated free will[being] astonishingly... decent". He concludes that "There's no better case for pluralism, diversity and democracy, along with a genuinely independent press."
Applications of the wisdom-of-crowds effect exist in three general categories: Prediction market
s, Delphi method
s, and extensions of the traditional opinion poll
.
Surowiecki discusses the success of prediction market
s. Similar to Delphi method
s but unlike opinion poll
s, prediction (information) markets ask questions like, “Who do you think will win the election?” and predict outcomes rather well. Answers to the question, "Who will you vote for?" are not as predictive.
Assets are cash values tied to specific outcomes (e.g., Candidate X will win the election) or parameters (e.g., Next quarter's revenue). The current market prices are interpreted as predictions of the probability of the event or the expected value of the parameter. Betfair
is the world's biggest prediction exchange, with around $28 billion traded in 2007. NewsFutures
is an international prediction market that generates consensus probabilities for news events. Several companies now offer enterprise class prediction marketplaces to predict project completion dates, sales, or the market potential for new ideas.. A number of Web-based quasi-prediction marketplace companies have sprung up to offer predictions primarily on sporting events and stock markets but also on other topics. Those companies include Piqqem
, Cake Financial
, Covestor
, Predictify
, and the Motley Fool
(with its Fool CAPS product). The principle of the prediction market is also used in project management software
such as Yanomo to let team members predict a project's "real" deadline and budget.
method which relies on a panel of independent experts. The carefully selected experts answer questionnaires in two or more rounds. After each round, a facilitator provides an anonymous summary of the experts’ forecasts from the previous round as well as the reasons they provided for their judgments. Thus, participants are encouraged to revise their earlier answers in light of the replies of other members of the group. It is believed that during this process the range of the answers will decrease and the group will converge towards the "correct" answer. Many of the consensus forecasts have proven to be more accurate than forecasts made by individuals.
1968 science fiction
novel Stand on Zanzibar
by John Brunner
includes an elaborate planet-wide information futures and betting pool called "Delphi" based on the Delphi method.
Illusionist Derren Brown
claimed to use the 'Wisdom of Crowds' concept to explain how he correctly predicted the UK National Lottery results in September 2009. His explanation was met with criticism on-line, by people who argued that the concept was misapplied. The Wisdom of Crowds concept by definition requires a known truth or absolute in order to work; the lottery has no such previously-existent absolute outcome. The methodology employed was too, flawed; the sample of people, couldn’t have been totally objective and free in thought, because they were gathered multiple times and socialised with each other too much; a condition Surowiecki tells us is corrosive to pure independence and the diversity of mind required (Surowiecki 2004:38). Groups thus fall into groupthink
where they increasingly make decisions based on influence of each other and are thus less accurate. However, other commentators have suggested that, given the entertainment nature of the show, Brown's misapplication of the theory may have been a deliberate smokescreen to conceal his true method.
finds fault with this notion. He explains that this notion may work in the Who Wants to be a Millionaire scenario because audience members have various levels of knowledge that can be coordinated to provide a correct answer in aggregate: Some persons will know the correct answer, others will know what are not the right answers and some will have no clue. Those who know the right answer will choose it, and the others will choose among what might seem the possible answers. The result will be to give a slight edge to the correct answer, even if only a few actually know the correct answer.
However, Tammet points out the potential for problems in systems which have less well defined means of pooling knowledge: Subject matter experts can be overruled and even wrongly punished by less knowledgeable persons in systems like Wikipedia, citing a case of this on Wikipedia. Furthermore, Tammet mentions the assessment of the accuracy of Wikipedia
as described in a study mentioned in Nature in 2005, outlining several flaws in the study's methodology which included that the study made no distinction between minor errors and large errors.
Tammet also cites the Kasparov versus the World
, an online competition that pitted the brainpower of tens of thousands of online chess players choosing moves in a match against Gary Kasparov, which was won by Kasparov, not the "crowd" (which was not "wise" according to Surowiecki's criteria.)
In his book You Are Not a Gadget, Jaron Lanier
argues that crowd wisdom is best suited for problems that involve optimization, but ill-suited for problems that require creativity or innovation. In the online article Digital Maoism, Lanier argues that the collective is more likely to be smart only when 1. it isn't defining its own questions, 2. when the goodness of an answer can be evaluated by a simple result (such as a single numeric value,) and 3. when the information system which informs the collective is filtered by a quality control mechanism that relies on individuals to a high degree. Only under those circumstances, a collective can be smarter than a person. If any of these conditions are broken, the collective becomes unreliable or worse.
James Surowiecki
James Michael Surowiecki is an American journalist. He is a staff writer at The New Yorker, where he writes a regular column on business and finance called "The Financial Page".-Background:...
about the aggregation of information in groups, resulting in decisions that, he argues, are often better than could have been made by any single member of the group. The book presents numerous case studies and anecdote
Anecdote
An anecdote is a short and amusing or interesting story about a real incident or person. It may be as brief as the setting and provocation of a bon mot. An anecdote is always presented as based on a real incident involving actual persons, whether famous or not, usually in an identifiable place...
s to illustrate its argument, and touches on several fields, primarily economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
and psychology
Psychology
Psychology is the study of the mind and behavior. Its immediate goal is to understand individuals and groups by both establishing general principles and researching specific cases. For many, the ultimate goal of psychology is to benefit society...
.
The opening anecdote relates Francis Galton
Francis Galton
Sir Francis Galton /ˈfrɑːnsɪs ˈgɔːltn̩/ FRS , cousin of Douglas Strutt Galton, half-cousin of Charles Darwin, was an English Victorian polymath: anthropologist, eugenicist, tropical explorer, geographer, inventor, meteorologist, proto-geneticist, psychometrician, and statistician...
's surprise that the crowd at a county fair accurately guessed the weight of an ox
Ox
An ox , also known as a bullock in Australia, New Zealand and India, is a bovine trained as a draft animal. Oxen are commonly castrated adult male cattle; castration makes the animals more tractable...
when their individual guesses were averaged (the average was closer to the ox's true butchered weight than the estimates of most crowd members, and also closer than any of the separate estimates made by cattle experts).
The book relates to diverse collections of independently-deciding individuals, rather than crowd psychology
Crowd psychology
Crowd psychology is a branch of social psychology. Ordinary people can typically gain direct power by acting collectively. Historically, because large groups of people have been able to bring about dramatic and sudden social change in a manner that bypasses established due process, they have also...
as traditionally understood. Its central thesis, that a diverse collection of independently-deciding individuals is likely to make certain types of decisions and predictions better than individuals or even experts, draws many parallels with statistical sampling
Sampling (statistics)
In statistics and survey methodology, sampling is concerned with the selection of a subset of individuals from within a population to estimate characteristics of the whole population....
, but there is little overt discussion of statistics in the book.
Its title is an allusion to Charles Mackay
Charles Mackay
Charles Mackay was a Scottish poet, journalist, and song writer.-Life:Charles Mackay was born in Perth, Scotland. His father was by turns a naval officer and a foot soldier; his mother died shortly after his birth. Charles was educated at the Caledonian Asylum, London, and at Brussels, but spent...
's Extraordinary Popular Delusions and the Madness of Crowds
Extraordinary Popular Delusions and the Madness of Crowds
Extraordinary Popular Delusions and the Madness of Crowds is a history of popular folly by Scottish journalist Charles Mackay, first published in 1841. The book chronicles its subjects in three parts: "National Delusions", "Peculiar Follies", and "Philosophical Delusions"...
, published in 1841.
Types of crowd wisdom
Surowiecki breaks down the advantages he sees in disorganized decisions into three main types, which he classifies as- Cognition
- Thinking and information Processing
- MarketMarketA market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
judgment, which he argues can be much faster, more reliable, and less subject to political forces than the deliberations of experts or expert committees.- Coordination
- Coordination of behavior includes optimizing the utilization of a popular bar and not colliding in moving traffic flows. The book is replete with examples from experimental economicsExperimental economicsExperimental economics is the application of experimental methods to study economic questions. Data collected in experiments are used to estimate effect size, test the validity of economic theories, and illuminate market mechanisms. Economic experiments usually use cash to motivate subjects, in...
, but this section relies more on naturally occurring experimentsNatural experimentA natural experiment is an observational study in which the assignment of treatments to subjects has been haphazard: That is, the assignment of treatments has been made "by nature", but not by experimenters. Thus, a natural experiment is not a controlled experiment...
such as pedestrians optimizing the pavementSidewalkA sidewalk, or pavement, footpath, footway, and sometimes platform, is a path along the side of a road. A sidewalk may accommodate moderate changes in grade and is normally separated from the vehicular section by a curb...
flow or the extent of crowding in popular restaurants. He examines how common understanding within a culture allows remarkably accurate judgments about specific reactions of other members of the cultureCultureCulture is a term that has many different inter-related meanings. For example, in 1952, Alfred Kroeber and Clyde Kluckhohn compiled a list of 164 definitions of "culture" in Culture: A Critical Review of Concepts and Definitions...
.- Cooperation
- How groups of people can form networks of trustTrust (sociology)In a social context, trust has several connotations. Definitions of trust typically refer to a situation characterised by the following aspects: One party is willing to rely on the actions of another party ; the situation is directed to the future. In addition, the trustor abandons control over...
without a central system controlling their behavior or directly enforcing their compliance. This section is especially pro free marketFree marketA free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
.
Four elements required to form a wise crowd
Not all crowds (groups) are wise. Consider, for example, mobs or crazed investors in a stock market bubbleStock market bubble
A stock market bubble is a type of economic bubble taking place in stock markets when market participants drive stock prices above their value in relation to some system of stock valuation....
. According to Surowiecki, these key criteria separate wise crowds from irrational ones:
| Criteria | Description |
|---|---|
| Diversity of opinion Opinion In general, an opinion is a subjective belief, and is the result of emotion or interpretation of facts. An opinion may be supported by an argument, although people may draw opposing opinions from the same set of facts. Opinions rarely change without new arguments being presented... |
Each person should have private information even if it's just an eccentric interpretation of the known facts. |
| Independence | People's opinions aren't determined by the opinions of those around them. |
| Decentralization | People are able to specialize and draw on local knowledge. |
| Aggregation | Some mechanism exists for turning private judgments into a collective decision Decision making Decision making can be regarded as the mental processes resulting in the selection of a course of action among several alternative scenarios. Every decision making process produces a final choice. The output can be an action or an opinion of choice.- Overview :Human performance in decision terms... . |
Based on Surowiecki’s book, Oinas-Kukkonen captures the wisdom of crowds approach with the following eight conjectures:
- It is possible to describe how people in a group think as a whole.
- In some cases, groups are remarkably intelligent and are often smarter than the smartest people in them.
- The three conditions for a group to be intelligent are diversity, independence, and decentralization.
- The best decisions are a product of disagreement and contest.
- Too much communication can make the group as a whole less intelligent.
- Information aggregation functionality is needed.
- The right information needs to be delivered to the right people in the right place, at the right time, and in the right way.
- There is no need to chase the expert.
Failures of crowd intelligence
Surowiecki studies situations (such as rational bubblesStock market bubble
A stock market bubble is a type of economic bubble taking place in stock markets when market participants drive stock prices above their value in relation to some system of stock valuation....
) in which the crowd produces very bad judgment, and argues that in these types of situations their cognition or cooperation failed because (in one way or another) the members of the crowd were too conscious of the opinions of others and began to emulate each other and conform rather than think differently. Although he gives experimental details of crowds collectively swayed by a persuasive speaker, he says that the main reason that groups of people intellectually conform is that the system for making decisions has a systematic flaw.
Surowiecki asserts that what happens when the decision making
Decision making
Decision making can be regarded as the mental processes resulting in the selection of a course of action among several alternative scenarios. Every decision making process produces a final choice. The output can be an action or an opinion of choice.- Overview :Human performance in decision terms...
environment is not set up to accept the crowd, is that the benefits of individual judgments and private information
Information
Information in its most restricted technical sense is a message or collection of messages that consists of an ordered sequence of symbols, or it is the meaning that can be interpreted from such a message or collection of messages. Information can be recorded or transmitted. It can be recorded as...
are lost and that the crowd can only do as well as its smartest member, rather than perform better (as he shows is otherwise possible). Detailed case histories of such failures include:
| Extreme | Description |
|---|---|
| Homogeneity | Surowiecki stresses the need for diversity within a crowd to ensure enough variance in approach, thought process, and private information. |
| Centralization | The Columbia shuttle disaster Space Shuttle Columbia disaster The Space Shuttle Columbia disaster occurred on February 1, 2003, when shortly before it was scheduled to conclude its 28th mission, STS-107, the Space Shuttle Columbia disintegrated over Texas and Louisiana during re-entry into the Earth's atmosphere, resulting in the death of all seven crew members... , which he blames on a hierarchical NASA NASA The National Aeronautics and Space Administration is the agency of the United States government that is responsible for the nation's civilian space program and for aeronautics and aerospace research... management bureaucracy that was totally closed to the wisdom of low-level engineers. |
| Division | The United States Intelligence Community United States Intelligence Community The United States Intelligence Community is a cooperative federation of 16 separate United States government agencies that work separately and together to conduct intelligence activities considered necessary for the conduct of foreign relations and the protection of the national security of the... , the 9/11 Commission Report claims, failed to prevent the 11 September 2001 attacks partly because information held by one subdivision was not accessible by another. Surowiecki's argument is that crowds (of intelligence Intelligence (information gathering) Intelligence assessment is the development of forecasts of behaviour or recommended courses of action to the leadership of an organization, based on a wide range of available information sources both overt and covert. Assessments are developed in response to requirements declared by the leadership... analyst Intelligence analysis Intelligence analysis is the process of taking known information about situations and entities of strategic, operational, or tactical importance, characterizing the known, and, with appropriate statements of probability, the future actions in those situations and by those entities... s in this case) work best when they choose for themselves what to work on and what information they need. (He cites the SARS-virus isolation as an example in which the free flow of data enabled laboratories around the world to coordinate research without a central point of control.) The Office of the Director of National Intelligence and the CIA have created a Wikipedia Wikipedia Wikipedia is a free, web-based, collaborative, multilingual encyclopedia project supported by the non-profit Wikimedia Foundation. Its 20 million articles have been written collaboratively by volunteers around the world. Almost all of its articles can be edited by anyone with access to the site,... -style information sharing network called Intellipedia Intellipedia Intellipedia is an online system for collaborative data sharing used by the United States Intelligence Community . It was established as a pilot project in late 2005 and formally announced in April 2006 and consists of three wikis running on JWICS, SIPRNet, and Intelink-U... that will help the free flow of information to prevent such failures again. |
| Imitation | Where choices are visible and made in sequence, an "information cascade" can form in which only the first few decision makers gain anything by contemplating the choices available: once past decisions have become sufficiently informative, it pays for later decision makers to simply copy those around them. This can lead to fragile social outcomes. |
| Emotionality | Emotional factors, such as a feeling of belonging, can lead to peer pressure Peer pressure Peer pressure refers to the influence exerted by a peer group in encouraging a person to change his or her attitudes, values, or behavior in order to conform to group norms. Social groups affected include membership groups, when the individual is "formally" a member , or a social clique... , herd instinct, and in extreme cases collective hysteria Collective hysteria Mass hysteria—other names include collective hysteria, group hysteria, or collective obsessional behavior—is the manifestation of the same or similar hysterical symptoms by more than one person. A common manifestation of mass hysteria occurs when a group of people believe they are suffering from a... . |
Connection
Surowiecki presented a session entitled Independent Individuals and Wise Crowds, or Is It Possible to Be Too Connected?He recommends:
- Keep your ties loose.
- Keep yourself exposed to as many diverse sources of information as possible.
- Make groups that range across hierarchies.
Tim O’Reilly and others also discuss the success of Google
Google
Google Inc. is an American multinational public corporation invested in Internet search, cloud computing, and advertising technologies. Google hosts and develops a number of Internet-based services and products, and generates profit primarily from advertising through its AdWords program...
, wiki
Wiki
A wiki is a website that allows the creation and editing of any number of interlinked web pages via a web browser using a simplified markup language or a WYSIWYG text editor. Wikis are typically powered by wiki software and are often used collaboratively by multiple users. Examples include...
s, blog
Blog
A blog is a type of website or part of a website supposed to be updated with new content from time to time. Blogs are usually maintained by an individual with regular entries of commentary, descriptions of events, or other material such as graphics or video. Entries are commonly displayed in...
ging, and Web 2.0
Web 2.0
The term Web 2.0 is associated with web applications that facilitate participatory information sharing, interoperability, user-centered design, and collaboration on the World Wide Web...
in the context of the wisdom of crowds.
Applications
Surowiecki is a very strong advocate of the benefits of decision markets and regrets the failure of DARPA's controversial Policy Analysis MarketPolicy Analysis Market
The Policy Analysis Market , part of the FutureMAP project, was a proposed futures exchange developed by the United States' Defense Advanced Research Projects Agency and based on an idea first proposed by Net Exchange, a San Diego research firm specializing in the development of online prediction...
to get off the ground. He points to the success of public and internal corporate markets as evidence that a collection of people with varying points of view but the same motivation (to make a good guess) can produce an accurate aggregate prediction. According to Surowiecki, the aggregate predictions have been shown to be more reliable than the output of any think tank
Think tank
A think tank is an organization that conducts research and engages in advocacy in areas such as social policy, political strategy, economics, military, and technology issues. Most think tanks are non-profit organizations, which some countries such as the United States and Canada provide with tax...
. He advocates extensions of the existing futures markets even into areas such as terrorist
Terrorism
Terrorism is the systematic use of terror, especially as a means of coercion. In the international community, however, terrorism has no universally agreed, legally binding, criminal law definition...
activity and prediction markets within companies.
To illustrate this thesis, he says that his publisher is able to publish a more compelling output by relying on individual authors under one-off contracts bringing book ideas to them. In this way they are able to tap into the wisdom of a much larger crowd than would be possible with an in-house writing team.
Will Hutton
Will Hutton
William Nicolas Hutton is an English writer, weekly columnist and former editor-in-chief for The Observer. He is currently Principal of Hertford College, Oxford and Chair of the Big Innovation Centre , an initiative from The Work Foundation , having been Chief Executive of The Work Foundation from...
has argued that Surowiecki's analysis applies to value judgments as well as factual issues, with crowd decisions that "emerge of our own aggregated free will
Applications of the wisdom-of-crowds effect exist in three general categories: Prediction market
Prediction market
Prediction markets are speculative markets created for the purpose of making predictions...
s, Delphi method
Delphi method
The Delphi method is a structured communication technique, originally developed as a systematic, interactive forecasting method which relies on a panel of experts.In the standard version, the experts answer questionnaires in two or more rounds...
s, and extensions of the traditional opinion poll
Psephology
Psephology is that branch of political science which deals with the study and scientific analysis of elections. Psephology uses historical precinct voting data, public opinion polls, campaign finance information and similar statistical data. The term was coined in the United Kingdom in 1952 by...
.
Prediction markets
The most common application is the prediction market, a speculative or betting market created to make verifiable predictions.Surowiecki discusses the success of prediction market
Prediction market
Prediction markets are speculative markets created for the purpose of making predictions...
s. Similar to Delphi method
Delphi method
The Delphi method is a structured communication technique, originally developed as a systematic, interactive forecasting method which relies on a panel of experts.In the standard version, the experts answer questionnaires in two or more rounds...
s but unlike opinion poll
Opinion poll
An opinion poll, sometimes simply referred to as a poll is a survey of public opinion from a particular sample. Opinion polls are usually designed to represent the opinions of a population by conducting a series of questions and then extrapolating generalities in ratio or within confidence...
s, prediction (information) markets ask questions like, “Who do you think will win the election?” and predict outcomes rather well. Answers to the question, "Who will you vote for?" are not as predictive.
Assets are cash values tied to specific outcomes (e.g., Candidate X will win the election) or parameters (e.g., Next quarter's revenue). The current market prices are interpreted as predictions of the probability of the event or the expected value of the parameter. Betfair
Betfair
Betfair is the world's largest Internet betting exchange. The company is based in Hammersmith in West London, England. Since Betfair was launched in June 2000 it has become the largest online betting company in the UK and the largest betting exchange in the world. Betfair claim to have over 3...
is the world's biggest prediction exchange, with around $28 billion traded in 2007. NewsFutures
NewsFutures
Prediction markets company NewsFutures has evolved into , "a consulting firm that specializes in developing and customizing online systems for large organizations to use to gather so-called Collective Intelligence from their employees."...
is an international prediction market that generates consensus probabilities for news events. Several companies now offer enterprise class prediction marketplaces to predict project completion dates, sales, or the market potential for new ideas.. A number of Web-based quasi-prediction marketplace companies have sprung up to offer predictions primarily on sporting events and stock markets but also on other topics. Those companies include Piqqem
Piqqem
Piqqem is an online stock selection service using a method of selection based on the Wisdom of Crowds.. It was launched in the fall of 2008 with angel funding from early-stage Apple investor Mike Markkula and Tellme Networks founder Mike McCue...
, Cake Financial
Cake Financial
Cake Financial was a free web-based financial services social network for individual investors allowing members to share their real stock portfolios and performance with other members. The site was introduced publicly on 17 September 2007, at the TechCrunch40 Conference, by Founder and CEO, Steven...
, Covestor
Covestor
Covestor is an online Investment Management platform that allows you to mirror the real trades of successful individual or Professional Investors...
, Predictify
Predictify
Predictify.com was a Web 2.0 company based in Redwood City, California. It was founded by Stanford University graduates Parker Barrile and Michael Agnich. It went out of business in 2009, . A similar "news prediction site" called HubDub also has closed...
, and the Motley Fool
Motley Fool
The Motley Fool is a multimedia financial-services company that provides financial solutions for investors through various stock, investing, and personal finance products. The Alexandria, Virginia-based private company was founded in July 1993 by co-chairmen and brothers David and Tom Gardner, and...
(with its Fool CAPS product). The principle of the prediction market is also used in project management software
Project management software
Project management software is a term covering many types of software, including estimation and planning, scheduling, cost control and budget management, resource allocation, collaboration software, communication, quality management and documentation or administration systems, which are used to...
such as Yanomo to let team members predict a project's "real" deadline and budget.
Delphi methods
The Delphi method is a systematic, interactive forecastingForecasting
Forecasting is the process of making statements about events whose actual outcomes have not yet been observed. A commonplace example might be estimation for some variable of interest at some specified future date. Prediction is a similar, but more general term...
method which relies on a panel of independent experts. The carefully selected experts answer questionnaires in two or more rounds. After each round, a facilitator provides an anonymous summary of the experts’ forecasts from the previous round as well as the reasons they provided for their judgments. Thus, participants are encouraged to revise their earlier answers in light of the replies of other members of the group. It is believed that during this process the range of the answers will decrease and the group will converge towards the "correct" answer. Many of the consensus forecasts have proven to be more accurate than forecasts made by individuals.
In popular culture
The Hugo-winningHugo Award for Best Novel
The Hugo Awards are given every year by the World Science Fiction Society for the best science fiction or fantasy works and achievements of the previous year. The award is named after Hugo Gernsback, the founder of the pioneering science fiction magazine Amazing Stories, and was once officially...
1968 science fiction
Science fiction
Science fiction is a genre of fiction dealing with imaginary but more or less plausible content such as future settings, futuristic science and technology, space travel, aliens, and paranormal abilities...
novel Stand on Zanzibar
Stand on Zanzibar
Stand on Zanzibar is a dystopian New Wave science fiction novel written by John Brunner and first published in 1968. The book won a Hugo Award for Best Novel at the 27th World Science Fiction Convention in 1969, as well as the 1969 BSFA Award and the 1973 Prix Tour-Apollo Award.-Description:A...
by John Brunner
John Brunner (novelist)
John Kilian Houston Brunner was a prolific British author of science fiction novels and stories. His 1968 novel Stand on Zanzibar, about an overpopulated world, won the 1968 Hugo Award for best science fiction novel. It also won the BSFA award the same year...
includes an elaborate planet-wide information futures and betting pool called "Delphi" based on the Delphi method.
Illusionist Derren Brown
Derren Brown
Derren Victor Brown is a British illusionist, mentalist, painter, writer and sceptic. He is known for his appearances in television specials, stage productions and British television series such as Trick of the Mind and Trick or Treat...
claimed to use the 'Wisdom of Crowds' concept to explain how he correctly predicted the UK National Lottery results in September 2009. His explanation was met with criticism on-line, by people who argued that the concept was misapplied. The Wisdom of Crowds concept by definition requires a known truth or absolute in order to work; the lottery has no such previously-existent absolute outcome. The methodology employed was too, flawed; the sample of people, couldn’t have been totally objective and free in thought, because they were gathered multiple times and socialised with each other too much; a condition Surowiecki tells us is corrosive to pure independence and the diversity of mind required (Surowiecki 2004:38). Groups thus fall into groupthink
Groupthink
Groupthink is a psychological phenomenon that occurs within groups of people. It is the mode of thinking that happens when the desire for harmony in a decision-making group overrides a realistic appraisal of alternatives. Group members try to minimize conflict and reach a consensus decision without...
where they increasingly make decisions based on influence of each other and are thus less accurate. However, other commentators have suggested that, given the entertainment nature of the show, Brown's misapplication of the theory may have been a deliberate smokescreen to conceal his true method.
Criticism
In his book Embracing the Wide Sky, Daniel TammetDaniel Tammet
Daniel Tammet is a British writer. His best selling 2006 memoir, Born On A Blue Day, about his life with high-functioning autism and savant syndrome, was named a "Best Book for Young Adults" in 2008 by the American Library Association.Tammet's second book, Embracing the Wide Sky, was named one of...
finds fault with this notion. He explains that this notion may work in the Who Wants to be a Millionaire scenario because audience members have various levels of knowledge that can be coordinated to provide a correct answer in aggregate: Some persons will know the correct answer, others will know what are not the right answers and some will have no clue. Those who know the right answer will choose it, and the others will choose among what might seem the possible answers. The result will be to give a slight edge to the correct answer, even if only a few actually know the correct answer.
However, Tammet points out the potential for problems in systems which have less well defined means of pooling knowledge: Subject matter experts can be overruled and even wrongly punished by less knowledgeable persons in systems like Wikipedia, citing a case of this on Wikipedia. Furthermore, Tammet mentions the assessment of the accuracy of Wikipedia
Reliability of Wikipedia
The reliability of Wikipedia , compared to other encyclopedias and more specialized sources, is assessed in many ways, including statistically, through comparative review, analysis of the historical patterns, and strengths and weaknesses inherent in the editing process unique to Wikipedia.Several...
as described in a study mentioned in Nature in 2005, outlining several flaws in the study's methodology which included that the study made no distinction between minor errors and large errors.
Tammet also cites the Kasparov versus the World
Kasparov versus The World
Kasparov versus the World was a game of chess played in 1999 over the Internet. Conducting the white pieces, Garry Kasparov faced the rest of the world in consultation, with the World Team moves to be decided by plurality vote. Over 50,000 individuals from more than 75 countries participated in the...
, an online competition that pitted the brainpower of tens of thousands of online chess players choosing moves in a match against Gary Kasparov, which was won by Kasparov, not the "crowd" (which was not "wise" according to Surowiecki's criteria.)
In his book You Are Not a Gadget, Jaron Lanier
Jaron Lanier
Jaron Zepel Lanier is an American computer scientist, best known for popularizing the term virtual reality .A pioneer in the field of VR, Lanier and Thomas G. Zimmerman left Atari in 1985 to found VPL Research, Inc., the first company to sell VR goggles and gloves...
argues that crowd wisdom is best suited for problems that involve optimization, but ill-suited for problems that require creativity or innovation. In the online article Digital Maoism, Lanier argues that the collective is more likely to be smart only when 1. it isn't defining its own questions, 2. when the goodness of an answer can be evaluated by a simple result (such as a single numeric value,) and 3. when the information system which informs the collective is filtered by a quality control mechanism that relies on individuals to a high degree. Only under those circumstances, a collective can be smarter than a person. If any of these conditions are broken, the collective becomes unreliable or worse.
See also
- Central Limit TheoremCentral limit theoremIn probability theory, the central limit theorem states conditions under which the mean of a sufficiently large number of independent random variables, each with finite mean and variance, will be approximately normally distributed. The central limit theorem has a number of variants. In its common...
- Collaborative FilteringCollaborative filteringCollaborative filtering is the process of filtering for information or patterns using techniques involving collaboration among multiple agents, viewpoints, data sources, etc. Applications of collaborative filtering typically involve very large data sets...
- CollarityCollarityCollarity is a privately funded web services company based in Palo Alto, California that provides a recommendation system, social search, and online advertising services for web publishers.-Company history:...
- Crowd fundingCrowd fundingCrowd funding describes the collective cooperation, attention and trust by people who network and pool their money and other resources together, usually via the Internet, to support efforts initiated by other people or organizations...
- Crowd psychologyCrowd psychologyCrowd psychology is a branch of social psychology. Ordinary people can typically gain direct power by acting collectively. Historically, because large groups of people have been able to bring about dramatic and sudden social change in a manner that bypasses established due process, they have also...
- CrowdsourcingCrowdsourcingCrowdsourcing is the act of sourcing tasks traditionally performed by specific individuals to a group of people or community through an open call....
- Dumb agent theoryDumb agent theoryThe dumb agent theory states that many people making individual buying and selling decisions will better reflect true value than any one individual can. In finance this theory is predicated on the efficient-market hypothesis . One of the first instances of the dumb agent theory in action was with...
- DotmocracyDotmocracyDotmocracy is an established facilitation method for collecting and recognizing levels of agreement on written statements among a large number of people...
- Efficient market hypothesisEfficient market hypothesisIn finance, the efficient-market hypothesis asserts that financial markets are "informationally efficient". That is, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made.There are...
- GroupthinkGroupthinkGroupthink is a psychological phenomenon that occurs within groups of people. It is the mode of thinking that happens when the desire for harmony in a decision-making group overrides a realistic appraisal of alternatives. Group members try to minimize conflict and reach a consensus decision without...
- Information Routing GroupInformation Routing GroupAn Information Routing Group is a component of social networks consisting of a semi-infinite set of similar interlocking and overlapping groups...
- Informational cascadeInformational cascadeAn information cascade occurs when people observe the actions of others and then make the same choice that the others have made, independently of their own private information signals...
- Iowa Electronic MarketsIowa Electronic MarketsThe Iowa Electronic Markets are a group of real-money prediction markets/futures markets operated by the University of Iowa Tippie College of Business...
- Open source governanceOpen source governanceOpen-source governance is a political philosophy which advocates the application of the philosophies of the open-source and open-content movements to democratic principles in order to enable any interested citizen to add to the creation of policy, as with a wiki document. Legislation is...
- PiqqemPiqqemPiqqem is an online stock selection service using a method of selection based on the Wisdom of Crowds.. It was launched in the fall of 2008 with angel funding from early-stage Apple investor Mike Markkula and Tellme Networks founder Mike McCue...
- Policy Analysis MarketPolicy Analysis MarketThe Policy Analysis Market , part of the FutureMAP project, was a proposed futures exchange developed by the United States' Defense Advanced Research Projects Agency and based on an idea first proposed by Net Exchange, a San Diego research firm specializing in the development of online prediction...
supported by the author of The Wisdom of Crowds - Problem solvingProblem solvingProblem solving is a mental process and is part of the larger problem process that includes problem finding and problem shaping. Consideredthe most complex of all intellectual functions, problem solving has been defined as higher-order cognitive process that requires the modulation and control of...
- Scenario VotingScenario VotingScenario Voting is an initiative by Microsoft to acquire customer satisfaction research on certain products. Microsoft's product teams can then use this information to improve the products.- External links :*...
, a Microsoft application of The Wisdom of Crowds - Who Wants to Be a Millionaire?Who Wants to Be a Millionaire?Who Wants to Be a Millionaire? is a television game show which offers large cash prizes for correctly answering a series of multiple-choice questions of increasing difficulty. The format is owned and licensed by Sony Pictures Television International. The maximum cash prize is one million pounds...
(The "Ask the Audience" option) - Wideband delphiWideband delphiThe Wideband Delphi estimation method is a consensus-based technique for estimating effort. It derives from the Delphi Method which was developed in the 1940s at the RAND Corporation as a forecasting tool...
- Wisdom-aware computing
Further reading
- Bikhchandani, Sushil, David HirshleiferDavid HirshleiferDavid Hirshleifer is a prominent American economist. He is a professor of finance and currently holds the Merage chair in Business Growth at the University of California at Irvine. He previously held tenured positions at the University of Michigan, The Ohio State University, and UCLA. His work...
, and Ivo WelchIvo WelchIvo Welch is an American economist at UCLA. His work has focused on financial economics and informational cascades. In 2007, he was ranked as the 54th most cited economist by web of science's Most-Cited Scientists in Economics&Business...
. "A Theory of Fads, Fashion, Custom, and Cultural Change as Informational CascadeInformational cascadeAn information cascade occurs when people observe the actions of others and then make the same choice that the others have made, independently of their own private information signals...
s." Journal of Political Economy, Vol. 100, No.5, pp. 992–1026, 1992. - Ivanov, KristoKristo IvanovKristo Ivanov is a Swedish-Brazilian information scientist and systems scientist of ethnic Bulgarian origin. He is professor emeritus at the Department of informatics of Umeå University in Sweden.-Biography:...
(1972). Quality-control of information: On the concept of accuracy of information in data banks and in management information systems: The University of Stockholm and The Royal Institute of TechnologyRoyal Institute of TechnologyThe Royal Institute of Technology is a university in Stockholm, Sweden. KTH was founded in 1827 as Sweden's first polytechnic and is one of Scandinavia's largest institutions of higher education in technology. KTH accounts for one-third of Sweden’s technical research and engineering education...
. (Doctoral diss. Diss. Abstracts Int. 1974, Vol 35A, 3, p. 1611-A. Nat. Techn. Info. Service NTIS order No. PB-219297 - Johnson, StevenSteven JohnsonSteven Johnson may refer to:* Steven Berlin Johnson , American popular science author* Steven Johnson , Australian V8 Supercar racing driver-See also:* Steve Johnson * Stephen Johnson...
, Emergence: the connected lives of ants, brains, cities and software (2002) Scribner, ISBN 0-684-86876-8 - Le Bon, GustaveGustave Le BonGustave Le Bon was a French social psychologist, sociologist, and amateur physicist...
. (1895), The Crowd: A Study of the Popular Mind. Available from Project GutenbergProject GutenbergProject Gutenberg is a volunteer effort to digitize and archive cultural works, to "encourage the creation and distribution of eBooks". Founded in 1971 by Michael S. Hart, it is the oldest digital library. Most of the items in its collection are the full texts of public domain books...
at University of PennsylvaniaUniversity of PennsylvaniaThe University of Pennsylvania is a private, Ivy League university located in Philadelphia, Pennsylvania, United States. Penn is the fourth-oldest institution of higher education in the United States,Penn is the fourth-oldest using the founding dates claimed by each institution... - Lee, Gerald Stanley. (1913). Crowds. A moving-picture of democracy. Doubleday, Page & Company. Available from Project GutenbergProject GutenbergProject Gutenberg is a volunteer effort to digitize and archive cultural works, to "encourage the creation and distribution of eBooks". Founded in 1971 by Michael S. Hart, it is the oldest digital library. Most of the items in its collection are the full texts of public domain books...
- Oinas-Kukkonen, Harri (2008). Network analysis and crowds of people as sources of new organisational knowledge. In: A. Koohang et al. (Eds): Knowledge Management: Theoretical Foundation. Informing Science Press, Santa Rosa, CA, US, pp. 173-189.
- Shirky, ClayClay ShirkyClay Shirky is an American writer, consultant and teacher on the social and economic effects of Internet technologies. He has a joint appointment at New York University as a Distinguished Writer in Residence at the Arthur L. Carter Journalism Institute and Assistant Arts Professor in the New...
(2009). Here Comes Everybody: The Power of Organizing Without Organizations PenguinPenguinPenguins are a group of aquatic, flightless birds living almost exclusively in the southern hemisphere, especially in Antarctica. Highly adapted for life in the water, penguins have countershaded dark and white plumage, and their wings have become flippers... - Sunstein, Cass R., Infotopia: How Many Minds Produce Knowledge (2006) Oxford University PressOxford University PressOxford University Press is the largest university press in the world. It is a department of the University of Oxford and is governed by a group of 15 academics appointed by the Vice-Chancellor known as the Delegates of the Press. They are headed by the Secretary to the Delegates, who serves as...
, ISBN 0195189280 - Surowiecki, JamesJames SurowieckiJames Michael Surowiecki is an American journalist. He is a staff writer at The New Yorker, where he writes a regular column on business and finance called "The Financial Page".-Background:...
(2004). The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations Little, Brown ISBN 0-316-86173-1 - Tarde, GabrielGabriel TardeJean-Gabriel De Tarde or Gabriel Tarde in short French sociologist, criminologist and social psychologist who conceived sociology as based on small psychological interactions among individuals , the fundamental forces being imitation and innovation.- Theory :Among the concepts...
(2001, orig. 1901). L'opinion et la foule. BookSurge Publishing, ISBN 0543970833 - L. Fisher, The Perfect Swarm : The Science of Complexity in Everyday Life, Basic Books, 2009.
- S. Roy Chowdhury, C. Rodriguez, F. Daniel, F. Casati. Wisdom-aware computing: on the interactive recommendation of composition knowledge. ICSOC'10 Proceedings of the 2010 international conference on Service-oriented computing, Springer-Verlag, San Francisco, CA, USA.