The Wisdom of Crowds

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The Wisdom of Crowds

• James Surowiecki

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Themes

• 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
  available
• Chasing the expert may be a mistake

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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 compromise
• Each member needs to be as independent as possible

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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 answer
• 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

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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

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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
  organizations
• Lack of diversity inhibits learning

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Why not rely on experts?

• Intelligence is narrow and is not fungible
• Experts are poor at calibrating their judgments
• 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

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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

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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

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How can we become more diverse?

• Decentralization
• Coordination
• Prosocial behavior

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Decentralization

• Decision can be based on local and specific
  knowledge
• Encourages independence and specialization while
  still supporting information sharing and
  coordination
• 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

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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

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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

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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

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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

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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

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Making committees work

• Decisions of small groups ubiquitous and
  consequential
• The influence of the people in the group on each
  others 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

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Issues

• Order of speaking may create a framing problem
• 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

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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
  assessments
• Conflict is ok
• Pay based on output or meeting targets?
• Incentive to seek new information
• Silos
• Ownership/responsibility/control
• Internal markets

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Democracy

• 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

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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 problems
• How do we live together?
• How can this work to our mutual benefit?

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One last thing

• It doesnt 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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Questions???