The Wisdom of Crowds by James Surowiecki
TweetUpdated Oct 3 with links to key concepts/articles: Just finished reading this must-read book. Surowiecki has done a fantastic job of compiling a great set of insights about crowds and groups. He hooks you into the book with Francis Galton’s analysis of the “guess the weight of the ox” contest. Galton discovers that when he averaged the guesstimates of all the 800 entries, it was eerily close to the actual weight of the ox. Surowiecki then goes on to categorize problems into cognition problems (of the ox type above), cooperation problems (like paying taxes) and coordination problems (like financial markets that coordinate buyers and sellers). Surowiecki proves with some fascinating examples under what conditions crowds make good decisions – independence of opinion, diversity of opinion, decentralization to enable usage of local knowledge and finally an aggregation mechanism to form the collective decision out of the individual ones. For instance, how the stock market beat down Morton Thiokol’s stock[PDF] right after the Space Shuttle Challenger’s explosion within minutes aftet the incident. Amazingly, 6 months later investigators laid the blame on the “O” ring made by Thiokol. He then covers Information Cascades (fads) with another set of great examples like the Plank Road Fever, Internet Bubble, Sellers’s Standard Screw, [PDF]Munshi’s Analysis of Green Revolution farmers of India…
The key insight he derives is that Information Cascades are less likely to happen the more important the decision. .
On the coordination problems front, Surowiecki again comes up with some compelling ones – Thomas Schelling’s experiment of asking students to meet in NYC without telling them the location and the students picking Grand Central Station (such converging focal points are called Schelling Points), how a giant flock of starlings coordinate their flying with a few simple rules. He then goes on to cover Vernon Smith’s experiments that prove how a market comes with the correct price for anything. On the cooperation problems front, Surowiecki uses examples like the Ultimatum Game, the Public Goods Game, the Dictator Game and uncovers some great insights like pro-social behavior, reciprocity, the principle of fairness, and that durability of relationships is more important than trust for cooperation. Surowiecki covers how small groups work in chapter 9 on committees, juries and teams. Again laden with great examples from the space shuttle Columbia disaster, Blinder and Morgan’s experiments($$).. This chapter has some key lessons for people in management. Overall its a fast-read type of book with page after page of insights explained with great clarity with examples. I’d say it changes your viewpoint on how you look at experts and expertise.
