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David Lucifer

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The Wisdom of Crowds
« on: 2004-07-08 22:03:12 »
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Mobbed Up by Cass R. Sunstein
Post date 06.17.04 | Issue date 06.28.04

The Wisdom of Crowds

Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes
Business, Economies, Societies, and Nations

By James Surowiecki
(Doubleday, 296 pp., $24.95)

In the summer of 2003, analysts at the Department of Defense had an
unusual idea. To predict important events in the world, including
terrorist attacks, they would create a kind of market in which ordinary
people could actually place bets. The proposed Policy Analysis Market
would allow each of us to invest in our predictions about such matters as
the growth of the Egyptian economy, the death of Yasir Arafat, and the
likelihood of terrorist attacks in the United States. Investors would win
or lose money on the basis of the accuracy of their predictions.
Predictably, the Policy Analysis Market produced a storm of criticism.
Ridiculed as "offensive" and "useless," the proposal was abandoned.

Amid the war on terrorism, why was the Defense Department so interested in
the Policy Analysis Market? The answer is simple: it wanted to have some
help in predicting geopolitical events, including those that would
endanger American interests, and it believed that a market would provide
that help. It speculated that if a large number of people could be given
an incentive to aggregate their private information, in the way that the
Policy Analysis Market would do, government officials would learn a great

Does this idea seem ludicrous? Since 1988, the University of Iowa has run
the Iowa Electronic Markets, which allow people to bet on the outcome of
presidential elections. As a predictor, the Iowa Electronic Markets have
produced extraordinarily accurate judgments, often doing better than
professional polling organizations. In the week before each of the last
four elections, the predictions in the Iowa market have shown an average
absolute error of just 1.5 percentage points, a significant improvement
over the 2.1 percentage point error in the final Gallup Polls. Or consider
the Hollywood Stock Exchange, in which people predict Oscar nominees and
winners, as well as opening weekend box-office successes. Here, too, the
level of accuracy has been exceptionally impressive, with (for example)
correct predictions of thirty-five out of forty Oscar nominees in 2002.

In fact, prediction markets are springing up all over the Internet,
allowing people to make bets on the likely outcomes of sports,
entertainment, finance, and political events. On tradesports.com, people
have been betting on whether Donald Rumsfeld will resign soon (extremely
unlikely), whether Osama bin Laden will be captured by June 2004
(extremely unlikely), whether John Edwards will be selected as John
Kerry's running mate (a good chance, but probably not), and whether George
W. Bush will be re-elected (more likely than not). One can imagine
prediction markets on any number of questions: Will gas prices reach $3
per gallon? Will cellular life be found on Mars? Will smallpox return to
the United States? Will there be a sequel to Master and Commander? Will
the Federal Communications Commission be abolished? (I didn't make these
up; they are actual or proposed questions on existing markets.)

James Surowiecki is fascinated by prediction markets. In his opinion, they
demonstrate that crowds are often wise. He rejects the widespread view
that groups of ordinary people are usually wrong--and that we do better to
ignore them and follow experts instead. Even when individuals blunder, he
believes, groups can excel: "Under the right circumstances, groups are
remarkably intelligent, and are often smarter than the smartest people in
them." This is so even when "most of the people within the group are not
especially well-informed or rational." What is wonderful, and surprising,
is that "when our imperfect judgments are aggregated in the right way, our
collective intelligence is often excellent." Instead of chasing experts,
we should consult that collective intelligence.

As an example, Surowiecki points to the television game show Who Wants to
Be a Millionaire?, on which contestants, if stumped, are permitted either
to consult the studio audience or to place a call to a trusted friend or
family member (selected in advance precisely because of his or her
knowledge and intelligence). As it happens, the trusted allies perform
well, producing correct answers 65 percent of the time. But the studio
audience performs much better, picking right answers a remarkable 91
percent of the time. Surowiecki also invokes an astonishing finding by the
British scientist Francis Galton, who tried to draw lessons about
collective intelligence by examining a competition in which contestants
guessed the weight of a fat ox at a regional fair in England. The ox
weighed 1,198 pounds; the average guess, from the 787 contestants, was
1,197 pounds. Or consider Google, the astonishingly successful Internet
search engine. Why does Google work so well? Surowiecki contends that its
technology "is built on the wisdom of crowds." The company's founders,
Sergey Brin and Lawrence Page, explain that the system "capitalizes on the
uniquely democratic character of the Web." Google is good at telling you
which site you are likely to want for one reason: it uses the collective
"votes" of many other people.

Surowiecki is concerned with how crowds can solve three kinds of problems.
The first are cognitive. These are factual questions with definite
solutions, identifiable now or in the future. Who will win the World
Series? How far from the Sun is the Earth? Will a certain surgery be
successful? A second set of problems involve coordination. Individuals
often need to select a shared course of action--driving on the same side
of the road or meeting at a certain place. A third set involve
cooperation. If people follow their self-interest, they might fail to
cooperate with one another, and hence they will lose their opportunities
for mutual advantage. Surowiecki contends that groups of people show far
more cooperation than we might predict.

Surowiecki does not make the implausible suggestion that all crowds are
wise. To qualify as such, a crowd needs to satisfy three conditions. It
must be diverse; its members must be independent; and it must have a
"particular kind of decentralization." Each of these conditions is
designed to ensure what most interests Surowiecki, which is the emergence
and the aggregation of information that group members have. Diversity is
important simply to ensure that the group has a lot of information. If a
crowd consists of nearly identical people, it is unlikely to be wise,
because the group will not know more than the individuals of whom it is
composed. Independence is necessary to ensure that people say what they
know rather than hide it. Surowiecki is alert to the fact that groups
often go wrong if members simply follow one another without pooling
individually held information. Hence he notes, correctly, that
organizations often do best if each individual behaves independently and
does not pay a great deal of attention to the acts and the statements of
others. "The smartest groups," he writes, "are made up of people with
diverse perspectives who are able to stay independent of each other." The
worst-performing investment clubs in the United States consist of people
who like one another, socialize together, and show a great deal of
consensus. The best performers consist of people who do not see each other
much and welcome dissent.

In calling for independence, Surowiecki emphasizes the serious risks
associated with "information cascades," which occur when people neglect
what they know and pay attention instead to the signals given by others.
(In social science, such cascades have been found to arise not only among
ordinary people choosing restaurants, sneakers, and political candidates,
but also among doctors making diagnoses and even federal judges deciding
cases.) The problem with information cascades is that group members are
likely to do far worse than they would if everyone disclosed his or her
private information. By pointing to the dangers of bad cascades,
Surowiecki signals the importance of starting with a "wide array of
options and information" and of having at least a few people who are
willing "to put their own judgment ahead of the group's, even when it's
not sensible to do so." Much of the time, Surowiecki writes, groups do
best if their members pay little "attention to what everyone else is

That about decentralization? Of Surowiecki's three conditions, this is the
least intuitive. He attempts to clarify it by focusing on the war against
terrorism. To wage that war successfully, of course, a great deal of
information must be assembled. Surowiecki is critical of the widespread
idea that what is needed is more centralization. Good solutions are far
more likely to follow, he argues, "if you set a crowd of self-interested,
independent people to work in a decentralized way on the same problem."
Surowiecki seeks processes in which independent people, all armed with
their own knowledge, are able to attend to problems "while also being able
to aggregate that local knowledge and private information into a
collective whole." The Iraq war is Surowiecki's example. Local American
commanders had considerable latitude to act on their own, but they were
also able to communicate rapidly, thus allowing successful overall
strategies to develop from a multitude of local judgments. Surowiecki
concludes that successful wars "may depend as much on the fast aggregation
of information from the field as on preexisting, top-down strategies."
(The problems that have arisen since the end of formal hostilities raise
obvious difficulties for Surowiecki's claims; perhaps information on the
ground is not being properly aggregated, or perhaps American officials
don't have enough information on the ground to stop continuing attacks.)
For intelligence relating to terrorism, Surowiecki argues that what is
needed is aggregation, not centralization. And here Surowiecki returns to
the ill-fated and roundly condemned Policy Analysis Market, suggesting
that it "was potentially a very good idea."

Surowiecki is also fascinated by the very different phenomenon of social
coordination. He points to the behavior of pedestrians on streets and
sidewalks, where individuals are able to coordinate their movement so as
not to bump into one another. Surowiecki pays tribute to "the beauty of a
well-coordinated crowd, in which lots of small, subtle adjustments in pace
and stride and direction add up to a relatively smooth and efficient
flow," as people "are constantly anticipating each other's behavior." He
thinks that pedestrian behavior helps to explain a great deal about the
human ability to understand and to follow norms or conventions that other
people follow at the same time.

Consider a little experiment by Thomas Schelling, who put the following
puzzle to law students at Yale in 1958: You are going to meet someone in
New York City. You do not know when or where, and you are unable to talk
to the other person ahead of time. What time and place do you choose?
Almost all the students said that they would meet at noon, and more than
half said that they would meet at the information booth at Grand Central
Station. As a more practical example, consider the universally accepted
rule of first-come, first-served seating in buses, subways, and movie
theaters. In Surowiecki's account, people are extremely good at generating
conventions by which they organize their relationships.

Solutions to coordination problems are stable; once we hit upon a shared
approach, we are likely to stick to it. Unfortunately, social cooperation
is much more fragile, simply because each cooperator has an incentive to
defect. Suppose that everyone in a certain community thinks that the
community will be better off if people engage in a recycling program. Even
if everyone agrees, some people will refuse to participate, thinking that
for them as individuals the costs of recycling exceed the benefits, even
if the reverse is true for the group as a whole. Self-interested human
beings try to "free ride" on the cooperation of others. And positing that
people are self-interested, many economists expect cooperation to be rare.
What interests Surowiecki is that cooperation is not rare at all. He
emphasizes the enormous importance of reciprocity to human endeavors.
Usually people will participate in a cooperative endeavor as long as they
believe that other people are doing so too. Borrowing a claim by the
political scientist Margaret Levi, Surowiecki concludes that people are
"contingent cooperators." Most people don't want to be selfish jerks, but
they also don't want to be dupes or fools. They will contribute to the
common good if they believe that this is the general practice.

Surowiecki uses these points to explore a wide range of social phenomena,
including scientific collaboration, stock prices, and corporate
performance. One of his most interesting discussions involves the Columbia
disaster and less-than-wise group deliberations at NASA. In Surowiecki's
account, NASA emphasized consensus over dissent, and so it failed to take
advantage of the information held by its engineers, who were perfectly
aware of the underlying uncertainties. Stressing "the utter absence of
debate and minority findings" in pre-launch discussions about the
Columbia, Surowiecki argues for the need to counteract the risks
associated with "group polarization." When group polarization occurs,
people engaged in deliberation with one another end up thinking a more
extreme version of what they thought before they started to talk. For
example, those who believe that global warming is a serious problem are
likely, as a result of internal discussions, to come to believe that
global warming is an extremely serious problem; people who think that the
Department of Justice is compromising civil liberties are likely to think,
after they talk with one another, that the Department of Justice has no
respect for civil liberties at all. So too officials at NASA, thinking
that space shuttles are essentially safe, might well end up believing that
safety is not a problem--even if several of them have private information
suggesting otherwise.

Surowiecki knows that the phenomenon of group polarization raises problems
for his thesis. If group members predictably end up thinking a more
extreme version of what they thought before, what makes them likely to be
wise? His answer is that groups need to contain safeguards to ensure that
individual judgments are genuinely independent. NASA would have done far
better if it had promoted a diversity of opinions and asked people to say
what they really thought, rather than allowing internal pressures to lead
people to squelch their doubts. The lesson here extends to many private
and public institutions.

Surowiecki is aware that his celebration of wise crowds has implications
for democracy. In light of his general argument, Surowiecki is suspicious
of rule by a "technocratic elite," insisting that insulated officials lack
the information to produce good decisions. But he does not think that
democracies are really solving cognition problems; that's not their
business. The reason is that unlike in cases involving simple facts, we
"have no standard that allows us to judge a political decision to be
'right' or 'wrong.'" For all the public talk about the "common good," that
idea is too disputed to provide objective solutions to political disputes.
Surowiecki concludes that democracy should be seen as a way not to produce
correct answers to particular questions, but to deal with "the most
fundamental problems of cooperation and coordination: How do we live
together? How can living together work to our mutual benefit?" On that
count, democracy has crucial advantages.

The performance of groups is a wonderful subject, and Surowiecki has a
remarkable eye for the telling anecdote, illustrating abstract claims with
vivid examples. His central point is convincing. Groups, and even crowds,
can be wiser than most and sometimes even all of their members, at least
if they aggregate information. But there is a serious problem with
Surowiecki's discussion: he does not provide an adequate account of the
circumstances that make crowds wise or stupid. Note first that the
"conditions" that he identifies (diversity, independence, and
decentralization) are neither necessary nor sufficient for the wisdom of
crowds. On his own analysis, those are the conditions for the solution of
problems of cognition, not problems of coordination or cooperation. People
do not have to be diverse, or independent, to choose Grand Central Station
as a meeting place in New York. If we want people to coordinate or to
cooperate, it might well be best if they are similar and if they follow
one another. To solve Surowiecki's three kinds of problems, quite
different conditions come into play. In any case, coordination and
cooperation problems don't come in neat boxes; life turns up all sorts of
mixtures (consider marriage) that Surowiecki neglects.

Even for cognition problems, some groups sometimes perform best if their
members are not independent and if they listen closely to one another.
Groups can benefit when error-prone people silence themselves and follow
the views expressed by their most sensible members. If the group contains
authorities on the question at hand, members ought to listen closely--and
possibly to shut up. Diversity is usually good, above all because it
allows groups to acquire more information. But what is needed is not
diversity as such, but diversity of the right kind. NASA's judgment would
not have been improved if the relevant officials had included members of
the Flat Earth Society, or people who believed that aliens are among us or
that space flight is simply impossible.

All of these points suggest that the key question is how much information
is held by various group members. Most generally, groups are wise only if
their members actually know something about the relevant questions.
Suppose that the studio audience in Who Wants to Be a Millionaire? were
asked not about popular culture but instead about the number of decisions
made by the Supreme Court every year. Is there any reason to expect that
the majority or even the plurality would be right? Galton's crowd was good
at judging the weight of a fat ox. But if its members were asked about the
number of atoms in that ox, the median guess wouldn't be very reliable.
(To have a reliable average response, the answers have to be better than
random, and there cannot be a systematic bias in one or another
direction.) Or imagine that a group of law professors is making decisions
about how to build a space shuttle. They are unlikely to decide well,
simply because law professors tend to know nothing about space shuttles.
(I undertook a little experiment, asking law professors to guess the
weight of the fuel used on a space shuttle; the right answer is 4.6
million pounds, and I won't embarrass my colleagues by announcing their
answers, except to say that the average was way off.)

Surowiecki thinks that the "simplest way to get reliably good answers is
just to ask the group each time." Judging the numbers of beans in a jar,
groups almost always outperform most of their individual members. (Try it
and you'll see.) Asking two hundred students to rank items by weight, one
experimenter found that the group's estimate was 94 percent accurate--a
figure excelled by only five individuals in that group. But it doesn't
follow that groups will always, or generally, produce good answers.
Everything depends on what the relevant people know. If you ask a group of
randomly selected people about how to perform heart surgery, you will
probably do better than if you asked a randomly selected individual; but
you would do better still if you asked someone who actually knew how to
perform heart surgery. Surowiecki loads the dice by pointing to areas in
which good answers come from properly aggregating information that is held
by many. In many areas, it is far more sensible to consult specialists.

The uses and the limits of Surowiecki's argument are helpfully approached
via the Condorcet Jury Theorem, a significant omission from Surowiecki's
presentation. Suppose that people are answering a common question with two
possible answers, one false and one true, and that the average probability
that each voter will answer correctly exceeds 50 percent. The Condorcet
Jury Theorem holds that if each member of the group is answering
independently, the probability of a correct answer, by a majority of the
group, increases toward certainty as the size of the group increases. The
theorem is based on some simple arithmetic, the details of which are
irrelevant here. Its importance lies in the demonstration that groups are
likely to do better than individuals, and large groups better than small
ones, if majority rule is used and if each person is more likely than not
to be correct. The crucial proviso is the last one. If each person is more
likely than not to err, then the theorem's prediction is reversed: the
probability of a correct answer, by a majority of the group, decreases
toward zero as the size of the group increases! It follows that groups are
error-prone if most of their members are likely to blunder.

Surowiecki might object that some crowds can be wise even when ignorance
is widespread. Consider the astonishing accuracy of the Iowa Electronic
Markets (and other prediction markets), in which good judgments come from
groups of investors that include many people who know little and are
perhaps more likely to be wrong than to be right. But we cannot easily
generalize from prediction markets, because they have several distinctive
features. Most important, they do not simply rely on the median or average
judgment of a randomly selected group of people. They are genuine markets,
in which people voluntarily choose to participate, presumably because they
think they know something. In addition, people are permitted to buy and to
sell shares on a continuing basis. In these circumstances, accurate
answers can emerge even if only a small percentage of participants have
good information.

In the Iowa Electronic Markets, it turns out that 85 percent of the
traders aren't so smart. They hold onto their shares for a long period and
then just accept someone else's prices. The market's predictions appear to
be driven by the other 15 percent--frequent traders who post their offers
rather than accepting those made by other people. The broader point is
that to work well, prediction markets do not require accurate judgments by
anything like the majority of participants. In this sense, prediction
markets are very different from judgments by ordinary crowds. Surowiecki's
claims about group wisdom don't adequately emphasize the unique
characteristics of these markets.

Surowiecki might have been expected to celebrate the cognitive virtues of
democratic judgments--to suggest that a system that allows a voice for
heterogeneous people and that encourages dissent is likely to come to
sensible decisions, simply because it heeds the wisdom of the crowd. If 51
percent of voters support George W. Bush, maybe we have reason to think
that they are right. But Surowiecki does not make this argument. As I have
said, he insists that in the democratic domain we lack standards
permitting us to distinguish decisions that are right from those that are
wrong. But political decisions depend crucially on predictions. Will large
deficits significantly increase interest rates? Will pre-emptive wars
increase or decrease the threat of terrorist attacks? Will tax cuts spur
economic growth? Problems of cognition are absolutely central to
democratic governance. Of course democratic judgments often involve
disputed judgments of value, for which demonstrably objective evidence is
hard to find. Are pre-emptive wars just? Is economic growth more important
than generous social safety nets? Still, in many matters government's
performance is improved, or undermined, because of how it deals with
cognition problems, and Surowiecki does not acknowledge this.

Return here to NASA, whose failures have been partly a product of a
culture that disfavors dissent. In fact, group polarization is a pervasive
problem in government circles, where like-minded officials often end up
holding a more extreme version of the view with which they began.
Surowiecki offers the example of the Bay of Pigs disaster, in which
President Kennedy's advisers squelched their private doubts and developed
unjustified enthusiasm for a ludicrous invasion plan predicated on the
absurd thought that twelve hundred people could unseat Castro and take
over Cuba. Is it too speculative to suggest that the current problems in
Iraq are partly a product of group polarization within the executive
branch--and that those problems could have been anticipated if the White
House had had a better process for aggregating privately held information?

Franklin Delano Roosevelt's famously disorganized and much-criticized
White House, with confusing lines of authority and multiple people working
on similar tasks, was ideally suited to the production of a wide range of
views and information. In this light, Surowiecki's dismissal of the idea
that sometimes democracy faces cognition problems prevents him from
exploring, or even seeing, some possible lessons for how to structure
democratic institutions. In war and in peace, such institutions could take
much more aggressive steps to elicit and to use existing information,
above all by creating mechanisms to aggregate what people know.

Cass R. Sunstein is a contributing editor at TNR.

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