Wisdom of Crowds

The Wisdom of Crowds by James Surowiecki

Book notes compiled by Jane L. Sigford

Introduction: When our imperfect judgments are aggregated in the right way our
collective intelligence is often excellent. This intelligence, or what Ill [Surowiecki}
call the wisdom of crowds, is at work in the world in many different guises. Its
the reason the Internet search engine Google can scan a billion Web pages and find
the one page that has the exact piece of information you were looking for. P. xiv.

The argument of this book is that chasing the expert is a mistake, and a costly one
at that. We should stop hunting and ask the crowd (which, of course, includes the
geniuses as well as everyone else) instead. P. xv.

There are conditions that are necessary for the crowd to be wise: diversity,
independence, and a particular kind of decentralization. P. xviii

Groups work well under certain circumstances, and less well under others. Groups
generally need rules to maintain order and coherence, and when theyre missing or
malfunctioning, the result is trouble. Groups benefit from members talking to and
learning from each other, but too much communication, paradoxically, can actually
make the group as a whole less intelligent.

While big groups are often good for solving certain kinds of problems, big groups
can also be unmanageable and inefficient. Conversely, small groups have the virtue
of being easy to run, but they risk having too little diversity of thought and too
much consensus.

Diversity and independence are important because the best collective decisions are
the product of disagreement and contest, not consensus or compromise. P. xix

The best way for a group to be smart is for each person in it to think and act as
independently as possible. P. xx.

Part 1
The Wisdom of Crowds

Random crowds on Who Wants to be a Millionaire picked the right answer

91% of the timemore than the other avenues of assistance. P. 4
If you ask a large enough group of diverse, independent people to make a
prediction or estimate a probability, and then average those estimates, the
errors each of them makes in coming up with an answer will cancel

1
Wisdom of Crowds

themselves out. Each persons guess, you might say, has two components:
information and error. Subtract the error, and youre left with the
information. P. 10
Ask a hundred people to answer a question or solve a problem, and the
average answer will often be at least as good as the answer of the smartest
member. With most things, the average is mediocrity. With decision-
making, its often excellence. You could say its as if weve been programmed
to be collectively smart. P. 11
The crowd is especially good in horse racing. The final odds reliably predict
the races order of finish (that is, the favorite wins most often, the horse
with the second lowest odds is the second-most-often winner. P. 14
Googlesurveying three billion Web pages and finding the right page quickly
is built on the wisdom of crowds. It uses the Page Rank algorithm first
defined by Sergey Brin and Lawrence Page, founders of Google p. 16
Google is a republic, not a perfect democracy. The more people that have
linked to a page, the more influence that page has on the final decision. P.
27
The real key of tapping into the wisdom of the crowd is to satisfy the
conditions of diversity, independence, and decentralization. P. 22

Chapter 2 The difference Difference Makes: Waggle Dances, the Bay of Pigs, and
the Value of diversity

Surowiecki gave the example of early automakers to illustrate how when

ideas first come into play, there is a plethora of ideas and styles which
gradually get winnowed. At one time there were around 200 different auto
makers
As time passes, the market winnows out the winners and losers, effectively
choosing which technologies will flourish and which will disappear
And, the experience of Google notwithstanding, there is no guarantee that
at the end of the process, the best technology will necessarily win (since the
crowd is not deciding all at once, but rather over time). P. 26
What is important is diversitynot in a sociological sense, but rather in a
conceptual and cognitive sense. P. 28
What makes a system successful is its ability to recognize losers and kill
them quickly. Or, rather, what makes a system successful is its ability to
generate lots of losers and then to recognize them as such and kill them off.
Sometimes the messiest approach is the wisest. P. 29
Generating a diverse set of possible solutions isnt enough. The crowd also
has to be able to distinguish the good solutions for the bad.
Diversity helps because it actually adds perspectives that would otherwise
be absent and because it takes away, or at least weakens, some of the

2
Wisdom of Crowds

destructive characteristics of group decision-making. Fostering diversity is

actually more important in small groups and in formal organizations that in
the kinds of larger collectivesfor a simple reason: because its easy for a
few biased individuals to exert undue influence and skew the groups
collective decision. P. 30
You are better off assembling a group of widely informed people than
allowing one or two experts to make a decision because theres no real
evidence that once can become expert in something as broad as decision
making or policy or strategy.
What cant be written off, though, is the dismal performance record of most
experts. P. 33
Experts are also surprisingly bad at what social scientists call calibrating
their judgments. If your judgments are well calibrated, then you have a
sense of how likely it is that your judgment is correct. But experts are
much like normal people: they routinely overestimate the likelihood that
theyre right. P. 33
Experts dont always realize they are wrong, and they dont have any idea
how wrong they were.
However well informed and sophisticated an expert is, his advice and
predictions should be pooled with those of others to get the most out of
him. P. 34
Past performance is no guarantee of future results. P. 35 [ IMPORTANT.
NOTE MINE]
Why do we cling to the idea that the right expert [or right curriculum NOTE
MINE] will save us? And why do we ignore the fact that simply averaging a
groups estimates will produce a very good result? We have bad instincts
about averaging. We assume averaging means dumbing down or
compromising. P. 35
We also assume that true intelligence resides only in individuals, so that
finding the right personthe right consultant, the right CEOwill make the
difference. In a sense, the crowd is blind to its own wisdom. If there are
enough people out there making predictions, a few of them are going to
compile an impressive record over time. That does not mean that the record
was the product of skill, nor does it mean that the record will continue into
the future. Again, trying to find smart people will not lead you astray.
Trying to find the smartest person will. P. 36
The negative case for diversity is that diversity makes it easier for a group
to make decisions based on facts, rather than on influence, authority, or
group allegiance.
Homogenous groups, particularly small ones, are often victims of
groupthink. P. 36 because they can become cohesive more easily than
diverse groups and can insulate themselves from the opinions of others.

3
Wisdom of Crowds

Because information that might represent a challenge to the conventional

wisdom is either excluded or rationalized as obviously mistaken, people come
away from discussions with their beliefs reinforced, convinced more than
ever that theyre right. P. 37
Homogeneity fosters palpable pressures toward conformity that groups
often bring to bear on their members. P. 38 If a person has a diverse
opinion, its easier to change his opinion than to challenge the group. P. 38
Diversity makes it easier for individuals to say what they think.

Chapter 3 Monkey See, Monkey do: Imitation, Information cascades, and

independence.

Independence is important to intelligent decision making because one: it

keeps mistakes that people make from becoming correlatederrors in
individual judgment wont wreck the groups collective judgment as long as
those errors arent systematically pointing in the same direction. One of the
quickest ways to make peoples judgments systematically biased is to make
them dependent on each other for information. And Two: independent
individuals are more likely to have new information rather than the same old
data everyone is already familiar with. P. 41 you can be biased and irrational,
but as long as youre independent, you wont make the group any dumber. P. 41
The more influence a groups members exert on each other, and the more
personal contact they have with each other, the less likely it is that the
groups decisions will be wise ones. The more influence we exert on each
other, the more likely it is that we will believe the same things and make the
same mistakes. That means its possible that we could become individually
smarter but collectively dumber. P. 42
Conventional wisdom is not the same as collective wisdom. P. 44
Sticking with the crowd and failing small, rather than trying to innovate and
run the risk of failing big, makes not just emotional but also professional
sense. This is the phenomenon thats sometimes called herding
Worldly wisdom teaches that it is better for reputation to fail
conventionally than to succeed unconventionally. From John Maynard
Keynes. Yet there is the fact that the crowd is right much of the time,
which means that paying attention to what others do should make you
smarter, not dumber. Information isnt in the hands of one person. Its
dispersed across many people. P. 51
When peoples decisions are made in sequence, instead of all at once, that is
called information cascade. Decisions cascade in relation to information of
others, not what an individual believes. That means that some people go to a
restaurant e.g. , and gives good reviews , then others follow. But if that

4
Wisdom of Crowds

initial information is incorrect, that people will make the wrong decision,
simply because the initial diners, by chance, got the wrong information. P. 54.
The fundamental problem with an information cascade is that after a certain
point it becomes rational for people to stop paying attention to their own
knowledgetheir private informationand to start looking instead at the
actions of others and imitate them. But once each individual stops relying on
his own knowledge, the cascade stops becoming informative. They think they
are making decisions based on what they know when in fact people are
making decisions based on what they think the people who came before them
knew.
Instead of aggregating all the information individuals have, the way a market
or a voting system does, the cascade becomes a sequence of uninformed
choices, so that collectively the group ends up making a bad decision. P.55
According to Malcolm Gladwell in The Tipping Point certain individuals
mavens, connectors, and salesmenare important in spreading ideas. Some
people are more influential than others, and cascades (he calls them
epidemics) move via social ties, rather than being a simple matter of
anonymous strangers observing each others behavior. P. 55.
People believe that the ones who have information are the mavens,
connectors and salesman. P. 55
If most decisions to adopt new technologies or social norms are driven by
cascades, there is no reason to think that the decisions we make are, on
average, good ones. Collective decisions are most likely to be good ones when
theyre made by people with diverse opinions reaching independent
conclusions, relying primarily on their private information. In cascades, none
of these things are true.
Effectively speaking, a few influential peopleeither because they happened
to go first, or because they have particular skills and fill particular holes in
peoples social networksdetermine the course of the cascade. In a
cascade, peoples decision are not made independently, but are profoundly
influenced by those around them. P. 57
Sometime we imitate others. In a sense it is a kind of rational response to
our own cognitive limits. Each person cant know everything.
In the long run, imitation has to be effective for people to keep doing it.
The more important the decision, the less likely a cascade is to take hold.
And thats obviously a good think since it means that the more important the
decision, the more likely it is that the groups collective verdict will be right.
Information cascades are interesting because they are a form of
aggregating information.
The fundamental problem with cascades is that peoples choices are made
sequentially, instead of all at once. P. 63

5
Wisdom of Crowds

One key to successful group decisions is getting people to pay much less
attention to what everyone else is saying. P. 65.

Chapter 4 putting the pieces together: the CIA, Linux, and the art of
decentralization.
What do we mean by decentralization?power does not reside in one central
location, and many important decisions are made by individuals based on their
own local and specific knowledge rather than by an omniscient or farseeing
planner. [Schools are an example NOTE MINE] p, 71
Decentralizations great strength is that it encourages independence and
specialization on the one hand while still allowing people to coordinate their
activities and solve difficult problems on the other.
Decentralizations great weakness is that theres no guarantee that valuable
information which is uncovered in one part of the system will find its way
through the rest of the system. P. 71
A decentralized system can only produce genuinely intelligent results if
theres a means of aggregating the information of everyone in the system.
[We dont have this in public education. NOTE MINE]
Aggregation, paradoxically, is therefore important to the success of
decentralization. P. 75
Decentralized works well in some conditions and not very well under others.
Given the premise of the book decentralized ways of organizing human
effort are, more often than not, likely to produce better results than
centralized ways. P. 75
Its hard to make real decentralization work, and hard to keep it going, and
easy for it to become disorganization. P. 76.
The kind of decentralization led to the lack of ability for security agencies
to coordinate information prior to 911. There was no way to aggregate and
share. P. 77

Chapter 5 Shall we Dance?: Coordination in a complex world

Coordination problem are ubiquitous e.g. what time should you leave for
work? Who will work where?
For coordination problems, independent decision-makingwhich doesnt take
the opinions of others into accountis pointless since what Im going to do
depends on what I think youre going to do. Theres no guarantee that
groups will come up with smart solutions but they often do.
Even on coordination problems, independent thinkers may be valuable. P. 89
Coordination problemshard to solve and coming up with any good answer is
a triumph. When what people want to do depends on what everyone else
wants to do, every decision affects every other decision, and there is no
outside reference point that can stop the self-reflexive spiral. P. 90

6
Wisdom of Crowds

Peoples experiences of the world are often surprisingly similar, which makes
successful coordination easier.
Culture also enables coordination in a different way, be establishing norms
and conventions that regulate behavior. Some of these norms are explicit
and bear the force of law.
Most norms are long-standing but it also seems possible to create new forms
of behavior quickly, particularly if doing so solves a problem. P. 92
Conventions obviously maintain order and stability and they reduce the
amount of cognitive work you have to put in to get through the day. We
dont have to think about how to act in some situations and allow groups of
disparate, unconnected people to organize themselves with relative ease and
an absence of conflict. P. 93 e.g. how people seat themselves in a theater,
even if they leave to get popcorn.
The most successful norms are not just imposed externally but are
internalized.
Convention has a profound effect on economic life and on the way companies
do business. Its the way its always been done. [We get hung up on that in
education a great deal. NOTE MINE] e.g. instead of laying off workers,
companies will reduce everyones pay to keep people working. [Is this an
example of value-laden behavior that is a good thing? He really doesnt
address values and ethics in this book and the influence on group behavior
from the values/ethical standpoint. NOTE MINE]
Another example is how movie tickets are priced. Economically, it makes
sense to charge more for newly released films and gradually decrease price
as they have been out a while. Yet we dont do that because thats not the
way its been done since movies were first made P. 99
In the stock market regular people not brokers-- do as well in the market
as do experts. A well functioning market will make everyone better off
than they were when trading beganbut better off compared to what they
were, not compared to anyone else. On the other hand, better off is better
off. Nave, unsophisticated agents, (Smith) says that these agents can
coordinate themselves to achieve complex, mutually beneficial ends even if
theyre not really sure, at the start, what those ends are or what it will take
to accomplish them. P. 107

Chapter 6: Society does exits: Taxes, Tipping, Television, and trust

Do people think that in an ideal world that everyone would have the same
amount of money? Not it means people think that, in an ideal world,
everyone would end up with the amount of money they deserved. [Is this a
leftover from our Calvinist/Puritan heritage? Is this true in other countries
such as Russia? NOTE MINE]

7
Wisdom of Crowds

Impulse toward fairness is a cross-cultural reality, but culture does have a

major effect on what counts as fair. More generally , high incomes by
themselves dont seem to bother Americans mucheven though America has
the most unequal distribution of income in the developed world, polls
consistently show that Americans care much less about inequality than
Europeans do. In fact in America the people whom inequality bothers most
are the rich. One reason for this is that Americans are far more likely to
believe that wealth is the result of initiative and skill, while Europeans are
far more likely to attribute it to luck. Americans still think, perhaps
inaccurately, of the US as a relatively mobile society, in which its possible
for a working-class kid to become rich. P. 115
Societies and organizations work only if people cooperate. Its impossible
for a society to rely on law alone to make sure citizens act honestly and
responsibly. So cooperation typically makes everyone better off. But for
each individual, its rarely rational to cooperate. It always make more sense
to look after your own interests first and then live off everyone elses work
if they are silly enough to cooperate. So why dont most of us do just that?
[Morals? Ethics? Religious upbringing? NOTE MINE]
The foundation of cooperation is not really trust, but the durability of the
relationship. The promise of our continued interaction keeps us in line. P. 117
A good society is defined more by how people treat strangers than by how
they treat those they know. P. 118
The benefits of trustthat is, of being trusting and of being trustworthy
are potentially immense, and because a successful market system teaches
people to recognize those benefits. P. 120
Establishing confidence in the reliability of corporations and products has
been a central part of the history of capitalism. P. 121
A defining characteristic of modern capitalism is the emphasis on the
accumulation of capital over the long run as opposed to merely short-term
profit. P. 122
If your prosperity in the long run depended on return business, on word-of-
mouth recommendations, and on ongoing relationships with suppliers and
partners, fair dealing became more valuable.
The sense of trust could not exist without the institutional and legal
framework that underpins every modern capitalist economy. The measure of
success of laws and contracts is how rarely they are invoked.
Trust begins because of the shadow of the future. All you really trust is
that the other person will recognize his self-interest. It becomes a general
sense of reliability, a willingness to cooperate because cooperation is the
best way to get things done. P. 125

8
Wisdom of Crowds

There is a problem as well: the more people trust, the easier they are for
others to exploit. And if trust is the most valuable social product of market
interactions, corruption is its most damaging. P. 126
The t.v. industry with the sweeps 4 times a year is an example of allowing a
single self-interested faction dictate a groups decisions. Because the
programming is different during sweeps, and only some people are polled, and
the results are not aggregated by the local market, just by the greater
market, the key players in the t.v. industry have allowed a single self-
interested group dictate the decision about programming. P. 134
Taxpaying is a cooperation problem. People will pay as long as they think
everyone else is paying too, even though you can reap all the benefits of a
tax systemeducation, parks, etcwithout paying. A healthy tax system
requires people to pay voluntarily. People also have to believe that the guilty
will be punished for not paying.
Successful taxpaying breed successful taxpaying. P. 141.

Part II
Chapter 7: Traffic: What we have here is a failure to Coordinate

The study of traffic is one that really looks at the behavior of crowds. Various
strategies to reduce traffic flow, e.g. London charging drivers $5. Each time
they come to central London during rush hour has been relatively successful.
Singapore has also had success in using computer chips and as soon as you enter
the pay zones, money is deducted from your account so drivers are in control.
This has been very successful. P. 147
One reason coordination on the highway is so difficult is the diversity of drivers
how people drive, use brakes, leave room between cars, etc. p. 153
Studies have shown that drivers are uncomfortable giving up control as in having
cars drive for you.
If an intelligent crowd cannot save itself from traffic jams, perhaps intelligent
highways can. P. 157 [by using meters, smart cards, traffic sensors, etc NOTE
MINE]

Chapter 8: Science: Collaboration competition, and reputation

Collaboration among scientists globally is an example of how the power of a

group is stronger than an individual. The discovery that SARS was caused by a
coronavirus was a global collaboration of scientists working together, literally
around the clock and around the globe. Pp 159-160 This collaboration gave each
lab the freedom to focus on what it believed to be the most premising lines of
investigation which is an exemplary case of how much of modern science gets
done. P. 161

9
Wisdom of Crowds

Scientists collaborate because as science becomes more specialized and more

subfields proliferate, it is difficult for a single person to know everything he
needs to know. P. 161
Collaboration makes it easier for scientists to work on interdisciplinary
problems which happen to be among todays most important and interesting
scientific problems.
Collaboration works because, when it works well, it guarantees a diversity of
perspectives.
Global collaboration like around the SARS virus remains unusual but Bozeman
found that academic researchers spend only a third of their time working with
people who are not in their immediate work group, and only a quarter of their
time working with people who are outside their university.
The value of working across not only universities but nations is clearly immense.
Researchers who spend a lot of time working with researchers in other nations
are significantly more productive than researchers who dont. [University
professors need to take heed because they are so caught up in research, name
recognition, etc. See book notes on Innovative University by Clayton
Christensen. NOTE MINE]
Science is collective because it depends on and has tried to institutionalize the
free and open exchange of information. [Why dont educators do this? NOTE
MINE]
When scientists make an important new discovery or experimentally prove some
hypothesis, they do not, in general, keep that information to themselves so that
they alone can ponder its meaning and derive additional theories. Sharing makes
it possible for other scientists to use that data to construct new hypotheses
and perform new experiments. The assumption is that society as a whole will
end up knowing more if information is diffused as widely as possible, rather than
being limited to a few people. P. 164
Pursuing their own self-interest is more complicated for scientists than it might
sound. While scientists are fundamentally competing for recognition and
attention that recognition and attention can only be afforded them by the very
people theyre competing against. So science presents us with the curious
paradox of enterprise that is simultaneously intensely competitive and intensely
cooperative. P. 166
The challenge the scientific community faces today is whether the success of
Western science can survive the growing commercialization of scientific
endeavors. P. 167
At the core of the process of accepting new ideas into the common fund of
knowledge is a kind of unexpressed faith in the collective wisdom of scientists.
P. 169
The collaboration with scientists has 2 important pieces. One good science
requires a degree of trust among scientists that even as they compete, they will

10
Wisdom of Crowds

also cooperate by playing fair with their data. Second, science depends not only
on an ever-replenishing pool of common knowledge but also on an implicit faith in
the collective wisdom of the scientific community to distinguish between those
hypotheses that are trustworthy and those that are not. P. 170
The flaw in the way the scientific community discovers truth is that most
scientific work never gets noticed.
Also those scientists who have name recognition are more likely to be published
and read than those who are no known. P. 171 Reputation should not be the
basis of a scientific hierarchy. P. 172

Chapter 9: Committees, Juries, and Tams: The Columbia disaster and how
small groups can be made to work.

Small groups are ubiquitous in American life, and their decisions are
consequential. Boards of directors, juries, etc.
Small groups are different in important ways because the nature of the
relationship in the group is qualitatively different.
Small groups can make very bad decisions because influence is more direct and
immediate and small-group judgments tend to be more volatile and extreme. P.
176
Few organizations have figured out how to make groups work well consistently.
Its still unusual for a small group to be more than just the sum of its parts,
Much of the time, far from adding value to their members, groups seem to
subtract it. Individuals will go along with others more readily. The more vocal
opinion often gets discussed. P. 177
Members, if there is disagreement, dismiss the need to gather more
information. They may just make a decision. P. 177
They succumb to confirmation bias which causes decision makers to
unconsciously seek those bits of information that confirm their underlying
intuitions.
A team may believe that it knows more than it does.
Small groups have a real danger in emphasizing consensus over dissent. They
prefer the illusion of certainty to the reality of doubt, e.g. Bay of Pigs decision,
p. 180
One thing that helps is that group deliberations are more successful when they
have a clear agenda and when leaders take an active role in making sure that
everyone gets a chance to speak. P. 182
Paradoxically, Stasser found that in unstructured, free-flowing discussions, the
information that tends to be talked about the most is the information that
everyone already knows. P. 183
Small groups also fall victim to the lack of diversity. Organizations tend to hire
from the same places, have groups of like-minded people. P. 183

11
Wisdom of Crowds

Small groups get polarized more readily. People are constantly comparing
themselves to everyone else and they want to maintain their position within the
group and tend to go along with the group or change their mind more so than in a
larger group. P. 185
The order in which people speak has a profound effect on the course of a
discussion. Those who speak earlier are more influential and they tend to
provide a framework within which the discussion occurs. P. 186
Talkativeness has profound effect on the kinds of decisions small groups reach.
If you talk a lot in a group, people will tend to think of you as influential almost
by default. Talkative people are not necessarily well-liked by other members of
the group, but they are listened to. And talkativeness feeds on itself. The
more someone talks, the more he is talked to by others in the group. So people
at the center of the group tend to become more important over the course of a
discussion. P. 187
There is no clear correlation between talkativeness and expertise.
Extremists tend to be more rigid and more convinced of their own rightness
than moderates. P. 188
Nonpolarized groups consistently make better decision and come up with better
answers than most of their members, and surprisingly often the group
outperforms even its best member. P. 189
There is no point in making small groups part of a leadership structure if you do
not give the group a method of aggregating the opinions of its members. If an
organization sets up teams and then uses them for purely advisory purposes, it
loses the true advantage that a team has: namely, collective wisdom. P. 191

Chapter 10 The Company: Meet the New Boss, same as the Old Boss?
No organizational model offers an ideal solution.
Although corporations pay lip service to becoming less hierarchical and more
collaborative, most American corporations did not try to do so. Collective
decision-making was too often confused with the quest for consensus.
Consensus-driven groupsespecially when the members are familiar with each
other-tend to trade in the familiar and squelch provocative debate.
Top execs are too often isolated from the real opinions of everyone else.
Too often corporations say they are making decisions democratic. They
confuse that democracy means endless discussions rather than a wider
distribution of decision-making power. P. 203
In American corporations the assumptions that integration, hierarchy, and the
concentration of power in a few hands lead to success continue to exert a
powerful hold on much of American business. While the success of Silicon
Valley companieswhich, in general do have more decentralized structures with
less emphasis on top-down decision makingmad companies anxious to at least
appear to be pushing authority down the hierarchy, reality has only rarely

12
Wisdom of Crowds

matched appearance, even though dramatic improvements in information

technology have made the diffusion of information to large numbers of
employees feasible and cost-effective.
At the same time, theres not much evidence that the flow of information up the
hierarchy has improved much either. P. 207
One of the things that gets in the way of the exchange of real information is a
deep-rooted hostility on the part of bosses to opposition from subordinates.
This is the real cost of a top-down approach to decision making: it confers the
illusion of perfectibility upon the decision makers and encourages everyone else
simply to play along. P. 208
What makes this particularly damaging is that, people in an organization already
have a natural inclination to avoid conflict and potential trouble.
Compounding this is the fact that managerial pay is often based not on how one
performs but rather on how one performs relative to expectations. Which tends
to lead corporations to falsify results, e.g. Enron.
Top-down corporations give people an incentive to hide information and
dissemble.
Decisions as much as possible, should be made by people close to the problem.
Genuine employee involvement remains an unusual phenomenon. P. 212
Although competition has beneficial effects, serious rivalries internally defeat
the purpose of having a company with a formal organization in the first place.
The competition should be with other companies, not between internal
departments. Again Enron had a competition internally. P. 214
Yet, today the CEO makes the ultimate decisions even though companies pay
greater attention to the virtues of decentralization and bottom-up mechanism,
they also treat their CEOs as superheroes. P. 216
Tenure for CEOs is shorter than it had ever been in the 1990s.
Whats perplexing is how little evidence there is that single individuals can
consistently make superior forecasts or strategic decisions in the face of
genuine uncertainty. P. 217
Decisions made by CEOs rarely have clean, measurable outcomes.
Sydney Finkelstein Past success is no guarantee of future success. P. 219
CEOs may have the right skills for the right time but that doesnt mean it will
happen in the next circumstance.
No decision-making system is going to guarantee corporate success because the
decisions are of mind-numbing complexity. We know that the more power you
give a single individual in the face of complexity and uncertainty, the more likely
it is that bad decisions will get made.
In practice the flow of information with the org. shouldnt be dictated by mgmt
charts. Companies should use ways of aggregating collective wisdom

13
Wisdom of Crowds

Major corporate decisions should be informed by decision markets, not made by

them. The more important the decision, the more important it is that it not be
left in the hands of a single person.
In the face of uncertainty, the collective judgment of a group of executives will
trump that of even the smartest executive. P. 223

Chapter 11: Markets: Equity Contests, Bowling alleys and stock prices

Investors sometimes herd, preferring the safety of the company of others to

making independent decision. They give too much credence to recent and high
profile news while underestimating the importance of longer-lasting trends or
less dramatic events.
Investors find losses more painfulby some accounts, twice as painfulas they
find gains pleasurable, and so they hold on to losing stocks longer than they
should, believing that as long as they havent sold the stock, then they havent
suffered any losses.
And, above all, investors are overconfident, which means that individuals trade
more than they should and end up costing themselves money as a result. P. 229
Theres plenty of evidence that professional investors suffer from many of the
same flaws as the rest of us. They herd, theyre overconfident, they
underestimate the impact of randomness, and they explain good results as the
product of skill and bad results as the product of bad luck.
Since the vast majority of money managers do worse than the market as a
whole, its a little hard to see them as paragons of rationality .p. 230
The idea of the wisdom of crowds is not that a group will always give you the
right answer but that on average it will consistently come up with a better
answer than any individual could provide. P. 235
Financial markets are decidedly imperfect at tapping into the collective wisdom,
especially relative to other methods of doing so.
One problem markets have is that theyre fertile ground for speculation.
Problem with the stock market is that there is never a point at which you can
say that its over, never a point at which you will definitely be proved right or
wrong, p. 237
[Stock market] Bubbles and crashes are textbook examples of collective
decision making gone wrong. In a bubble, all of the conditions that make groups
intelligentindependence, diversity, private judgmentdisappear.
Bubbles are really characteristic of what we think of as financial marketsnot
the real economy as in buying and selling t.v. sets and apples,
The price of a stock often reflects a series of dependent decisions, because
when many people calculate what a stock is worth, their evaluation depends, at
least in part, on what everyone else believes the stock to be worth. P. 247

14
Wisdom of Crowds

Bubbles and crashes occur when the mix [of opinions] shifts too far in the
direction of dependence.
A crash is simply the inverse of a bubble, although its typically more sudden and
vicious. In a crash, investors are similarly uninterested in the real value of a
stock, and similarly obsessed with reselling it.249
The insidiousness of a bubble, is that the longer it goes on, the less bubble like
it seems. Part of that is the fact that no one knows when its going to end (just
as no one, even in retrospect can really know when it started.} p. 251
Bubbles are not collective hysteria. If groups on the whole are relatively
intelligent (as we know they are), then theres a good chance that a stock price
is actually right. The problem is that once everyone starts piggybacking on the
wisdom of the group, then no one is doing anything to add to the wisdom of the
group. P. 251
As investors start mirroring each other, the wisdom of the group as a whole
declines. P. 251
Groups are only smart when there is a balance between the information that
everyone in the group shares and the information that each member holds
privately. And the media does play a role in that process. P. 246

Chapter 12: Democracy: Dreams of the Common Good

What is democracy for? Is democracy really about promoting self-interest not

the common good?
In reality a vote has effectively zero chance of changing the outcome of an
election, and for most people, the impact any one politicianeven the president
will have on their everyday lives is relatively small.
Yet people vote because they believe its their duty. P. 264
The question for a representative democracy is Are Americans likely to pick the
candidate who will make the right decision? On those terms, it seems more than
plausible that they are. The fact that people dont know how much the US
spends on foreign aid is no sign of their lack of intelligence. Its a sign of their
lack of information which itself is an indication of their lack of interest in
political details.
One essential ingredient of a healthy democracy is competition which makes it
more likely that politicians will make good decisions by making it more likely that
they will be punished when they dont. p. 266
Would we be better off being ruled by a technocratic elite which in fact we
have with the influence exerted by such people as Donald Rumsfeld or Colin
Power? But one would be hard-pressed to argue that most elites are able to see
past their ideological blinders and uncover the imaginary public interest. [Just
think of the influence Dick Cheney had. NOTE MINE]

15
Wisdom of Crowds

The experts dont know the answers. Elites are just as partisan and no more
devoted to the public interest than the average voter. P. 267
Democracy allows for the persistent injection into the system of what
Surowiecki called local knowledge. About the impact of government on the
everyday lives of citizens. P. 267
In the Federalist Papers James Madison feared factions because he felt they
would make it harder for government to seek the public good. That fear
survives today in the familiar critique of the power of interest groups and
lobbyists [and we had a Supreme Court that allowed PACS to contribute vast
amounts of money to exert influence!!!! NOTE MINE]
In a democracy we have no standard that allows us to judge a political decision
to be right or wrong. There is really no objective sense of what the
common good is. Two politicians may see that entirely differently. P. 270
Choosing candidates and making policy in a democracy are not, in that sense,
cognition problems and so we should not expect them to yield themselves to the
wisdom of the crowd. On the other hand, theres no reason to think that any
other political system (dictatorship, aristocracy, rule by elites) will be any
better at making policy, and the risks built into those systemsmost notably
the risk of the exercise of unchecked and unaccountable powerare much
greater than those in a democracy. P. 270
Democracy is a way 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.
A healthy democracy inculcates the virtues of compromise and change. The
decisions that democracies make may not demonstrate the wisdom of the crowd.
The decision to make them democratically does. P. 271

Afterword
Growing interest in collective wisdom is the product of a host of different
factors but Surowiecki thinks it is directly to the increased importance of the
Internet. The Net is fundamentally respectful of and invests in the idea of
collective wisdom, and in some sense hostile to the idea that power and
authority should belong to a select few. Wikipedia and the Net and
antihierarchical. P. 275-6
We dont always know where good information is. Thats why in general, its
smarter to cast as wide a net as possible, rather than wasting time figuring out
who should be in the group and who should not.
The Wisdom of Crowds is not an argument against experts, but against our
excessive faith in the single individual decision maker. P. 277 For two reasons:
identifying true experts is surprisingly hard to identify and if the group is
smart enough to identify that expert its smart enough not to need that expert.
P. 278

16
Wisdom of Crowds

If youre careful to keep a group diverse, and careful to prevent people from
influencing one another too much, the individual mistakes people make will be
irrelevant. And their collective judgment will be wise. P. 279
It is certainly true that you often need a smart individual to recognize the
intelligence of the group. As the value of collective wisdom becomes more
widely recognized, people will be more likely to adopt, on their own, collective
approaches to problem solving and the Internet affords us any number of
examples of wise crowds that are, for the most part, self-organized and self-
managed. Were a long way from anything resembling bottom-up decision
making, either in government or in corporate America, [or in education NOTE
MINE], but certainly the potential for it now exists. P. 281
What Surowiecki thinks we know now is that in the long run, the crowds
judgment is going to give us the best chance of making the right decision, and in
the face of that knowledge, traditional notions of power and leadership should
begin to pale. P. 282

17