The crowd is smarter than you think
Author delves into 'The Wisdom of Crowds'
By Todd Leopold
(CNN) -- What do jellybeans, a downed submarine, the SARS epidemic and the development of the U.S. auto industry have in common?
They all show how smart crowds can be.
Crowds? The great unwashed? Aren't crowds responsible for the stock market bubble, boorish behavior at baseball games and the rise of Britney Spears?
Well, yes. And no, says author James Surowiecki.
In his new book, "The Wisdom of Crowds" (Doubleday), Surowiecki -- who writes "The Financial Page" for The New Yorker -- shows how the combined intelligence and input of a group of people can create optimum conclusions, whether in a financial marketplace or a county fair.
"When I started writing about business," Surowiecki says in a phone interview, "I wondered how and why markets work as well as they do."
Markets, of course, are often thought to be simple beasts, the lowest-common-denominator results of many sources of information. The smart people are those who "beat the market," individuals who make profits or pursue innovation by rejecting conventional wisdom -- that is, the assumed thought of the big, dumb crowd.
And yet Surowiecki noticed that, often, markets -- or other forms of collective thought -- were "smarter" than the individuals who participated in them. Markets weed out the weak, the poor ideas, the faltering processes -- and they're also capable of assembling the diverse information of their participants into the right answer.
Smart as an ox-weighing
In an early example, Surowiecki refers to a study conducted by the British scientist Francis Galton. Galton was a believer in the power of the elite, noting "the stupidity and wrong-headedness of many men and women being so great as to be scarcely credible." But at a fair, he noticed a wagering competition in which people bet on the weight of an ox. Eight hundred people participated; some were butchers and farmers, others just idle guessers.
When Galton averaged the estimates, he expected the result to be way off. Instead, the crowd had come within one pound of the ox's weight.
Author James Surowiecki
The same is true of jellybean contests, in which people try to guess how many jellybeans are in a jar. The collective guess is often closer than any individual determination.
"The Wisdom of Crowds" is full of this sort of telling anecdote. In 1968, when the submarine Scorpion went down in the north Atlantic, the navy had only the most general idea of where it was.
Yet, using the expertise of various experts in diverse disciplines, and combining them through mathematical formulas, a naval officer managed to determine its resting place within 220 yards.
Or take SARS. Despite the virus being completely unknown upon first being revealed in February 2003, within two months, a group of labs was able to identify its source.
And even the most brutal side of markets -- ruthless efficiency -- has its upside. In the early years of the century, there were hundreds of car companies in the United States. By the 1950s, there were four left -- the four that had done the best job of negotiating the whims and vagaries of the marketplace.
A culture of ideas
There are flaws with group wisdom, Surowiecki says. The best collective ideas come out of diverse contributions, but some groups might have individuals so strong that others play follow-the-leader instead of thinking for themselves.
Other times the group may ignore worthwhile information. This is what happened in the Columbia tragedy, in which the group guiding the space shuttle disregarded the possibility that the block of foam that broke off may have caused serious damage. (Moreover, a Columbia group leader decided that NASA couldn't do anything about a problem if there was one; as Surowiecki writes, "This was not exactly the ethos that brought Apollo 13 safely back to Earth.")
Surowiecki sees Japan as an example of a group that accomplished great things because of a team ethic, yet has been limited by its deferential culture.
"When we talk about [the wisdom of] groups ... it's about independent judgment and collective mechanisms," he says. "In Japan the group doesn't work as well because the idea is to not offend anyone else."
And yet, he adds, "Japan did well by encouraging companies to compete in the outside world." To gain a foothold in the world market, Japanese companies had to be innovative -- producing inexpensive, high-quality electronics and cars, for example -- and fostered a culture in which team members were encouraged to contribute ideas and take pride in the whole.
If anything can hurt markets, says Surowiecki, it's lack of trust. Capitalism has succeeded, he says, because people are willing to trust their money with strangers. The misstatements and financial chicanery of the late-'90s bubble have wounded that confidence.
"The challenge for capitalism is that the things that breed trust also breed the environment for fraud," he says. People can make money by working together -- but when the sums of money are as huge as they've been of late, it can be very tempting for people to subvert the system for their own gains.
And yet Surowiecki has hope that trust can be maintained and, indeed, markets can keep improving. Economists and psychologists have found indications that our first impulse -- as people and consumers -- "is to do the socially beneficial thing," he says.
"I think there's some cooperative impulse in all of us," he says. "So the question is, do you fan that? Or do you eradicate it?"