The Wisdom of Crowds by James Surowiecki Flashcards
(95 cards)
1
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But experts are much like normal people: they routinely overestimate the likelihood that they’re right.
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The Wisdom of Crowds by James Surowiecki
2
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And it means that attempting to “chase the expert,” looking for the one man who will have the answers to an organization’s problem, is a waste of time.
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The Wisdom of Crowds by James Surowiecki
3
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cognitive diversity is essential to good decision making.
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The Wisdom of Crowds by James Surowiecki
4
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Deliberation in a groupthink setting has the disturbing effect not of opening people’s minds but of closing them.
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The Wisdom of Crowds by James Surowiecki
5
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When the pressure to conform is at work, a person changes his opinion not because he actually believes something different but because it’s easier to change his opinion than to challenge the group.
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The Wisdom of Crowds by James Surowiecki
6
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Every move an ant makes depends on what its fellow ants do, and an ant cannot act independently, which would help break the march to death.
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7
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people—unlike a colony of ants—is far more likely to come up with a good decision if the people in the group are independent of each other.
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The Wisdom of Crowds by James Surowiecki
8
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One of the quickest ways to make people’s judgments systematically biased is to make them dependent on each other for information.
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The Wisdom of Crowds by James Surowiecki
9
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The smartest groups, then, are made up of people with diverse perspectives who are able to stay independent of each other.
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The Wisdom of Crowds by James Surowiecki
10
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the more influence a group’s members exert on each other, and the more personal contact they have with each other, the less likely it is that the group’s decisions will be wise ones.
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The Wisdom of Crowds by James Surowiecki
11
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That means it’s possible that we could become individually smarter but collectively dumber.
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The Wisdom of Crowds by James Surowiecki
12
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“conventional wisdom” is not the same as “collective wisdom.”)
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The Wisdom of Crowds by James Surowiecki
13
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Under those conditions, 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 that’s sometimes called herding.
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The Wisdom of Crowds by James Surowiecki
14
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So relying on only your private information to make a decision guarantees that it will be less informed than it could be.
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The Wisdom of Crowds by James Surowiecki
15
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The problem starts when people’s decisions are not made all at once but rather in sequence,
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The Wisdom of Crowds by James Surowiecki
16
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(although it is true that we would make better collective decisions if we all stopped taking only our friends’ advice).
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The Wisdom of Crowds by James Surowiecki
17
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imitation is a kind of rational response to our own cognitive limits.
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The Wisdom of Crowds by James Surowiecki
18
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groups are better at deciding between possible solutions to a problem than they are at coming up with them. Invention may still be an individual
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The Wisdom of Crowds by James Surowiecki
19
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They overestimate their ability, their level of knowledge, and their decision-making prowess.
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The Wisdom of Crowds by James Surowiecki
20
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But it is good for society as a whole, because overconfident people are less likely to get sucked into a negative information cascade, and, in the right circumstances, are even able to break cascades.
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The Wisdom of Crowds by James Surowiecki
21
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the more important the decision, the less likely a cascade is to take hold.
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The Wisdom of Crowds by James Surowiecki
22
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If you want to improve an organization’s or an economy’s decision making, one of the best things you can do is make sure, as much as possible, that decisions are made simultaneously (or close to it) rather than one after the other.
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The Wisdom of Crowds by James Surowiecki
23
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Encouraging people to make incorrect guesses actually made the group as a whole smarter.
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The Wisdom of Crowds by James Surowiecki
24
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One key to successful group decisions is getting people to pay much less attention to what everyone else is saying.
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The idea of the wisdom of crowds also takes decentralization as a given and a good, since it implies that if you set a crowd of self-interested, independent people to work in a decentralized way on the same problem, instead of trying to direct their efforts from the top down, their collective solution is likely to be better than any other solution you could come up with.
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Tacit knowledge is knowledge that can’t be easily summarized or conveyed to others, because it is specific to a particular place or job or experience,
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closer a person is to a problem, the more likely he or she is to have a good solution to it.
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where Moses’ father-in-law counseled him to judge only in “great matter[s]” and to leave all other decisions to local rulers.
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Decentralization’s great weakness is that there’s no guarantee that valuable information which is uncovered in one part of the system will find its way through the rest of the system.
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What you’d like is a way for individuals to specialize and to acquire local knowledge—which increases the total amount of information available in the system—while also being able to aggregate that local knowledge and private information into a collective whole,
The Wisdom of Crowds by James Surowiecki
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As a general rule, discussions tend to move both the group as a whole and the individuals within it toward more extreme positions than the ones they entered the discussion with.
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evidence suggests that the order in which people speak has a profound effect on the course of a discussion. Earlier comments are more influential, and they tend to provide a framework within which the discussion occurs.
The Wisdom of Crowds by James Surowiecki
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Talkativeness may seem like a curious thing to worry about, but in fact talkativeness has a major impact 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. Studies of group dynamics almost always show that 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.
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Studies of group dynamics almost always show that 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.
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people who imagine themselves as leaders will often overestimate their own knowledge and project an air of confidence and expertise that is unjustified.
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The group’s decisions were both faster and more accurate (the group got the direction right 89 percent of the time, versus 84 percent for individuals), and outperformed even the best individual.
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groups were not just piggybacking on really smart individuals. They genuinely were smarter than the smartest people within them.
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10. THE COMPANY: MEET THE NEW BOSS, SAME AS THE OLD BOSS?
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The problem with the “outsource everything” model, Coase saw, was that setting up and monitoring all those different deals and contracts takes a lot of time and effort.
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These are all what Coase called “transaction costs,” which include “search and information costs, bargaining and decision costs, policing and enforcement costs.”
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What the gangster-film theory of business suggests is that no organizational model offers an ideal solution. Once you leave the market behind and attempt to consciously organize individuals toward a common goal, you face inevitable trade-offs. That’s one reason why today companies like Zara are effectively trying to blend the three gangster-film models of business into one. Companies want to retain the structure and institutional coherence of the traditional corporation. They want tightly knit groups to do much of the work at the day-to-day level. And they want to be able to have access to workers and thinkers (if not safecrackers) from outside the corporation as well.
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those companies that tried to make the decision-making process more “democratic” thought democracy meant endless discussion rather than a wider distribution of decision-making power.
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When coordination takes place inside a company without being dictated by top-down leadership, it has the potential to make the company as a whole lighter and more flexible.
The Wisdom of Crowds by James Surowiecki
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Perhaps the deepest problem with the rigidly hierarchical, multilayered corporation was—and is—that it discouraged the free flow of information,
The Wisdom of Crowds by James Surowiecki
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A 1962 study of young executives, for instance, found that the more anxious they were about moving up the job ladder, “the less accurately they communicate[d] problem-related information.” They were smart to do so. Another study of fifty-two middle managers found that there was a correlation between upward mobility and not telling the boss about things that had gone wrong. The most successful executives tended not to disclose information about fights, budget problems, and so on.
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That’s an essential part of what markets do: encourage people to find new valuable information and then let everyone else know about it. And this, too, is what corporations should be looking for: ways to provide their employees with the incentive to uncover and act on private information.
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decisions about local problems should be made, as much as possible, by people close to the problem.
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tacit knowledge—knowledge that emerged only from experience—was crucial to the efficiency of markets.
The Wisdom of Crowds by James Surowiecki
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The virtues of specialization and local knowledge often outweigh managerial expertise in decision making.
The Wisdom of Crowds by James Surowiecki
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The virtues of decentralization are twofold. On the one hand, the more responsibility people have for their own environments, the more engaged they will be.
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The second thing decentralization makes easier is coordination.
The Wisdom of Crowds by James Surowiecki
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There is a catch in all this, though. Decentralized markets work exceptionally well because the people and companies in those markets are getting constant feedback from customers. Companies that aren’t doing a good job or that are spending too much learn to adjust or else they go out of business.
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decentralization only works if everyone is playing on the same team.
The Wisdom of Crowds by James Surowiecki
54
efficiency expert Frederick Winslow Taylor, in the early 1900s, described the good worker as someone whose job was to do “just what he is told to do, and no back talk. When the [foreman] tells you to walk, you walk; when he tells you to sit down, you sit down.”
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companies expected their CEOs to be “corporate saviors.”
The Wisdom of Crowds by James Surowiecki
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95 percent of investors said that they would buy a stock based on what they thought of the company’s CEO.
The Wisdom of Crowds by James Surowiecki
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Something like 80 percent of all new products introduced in a given year—products that CEOs presumably have signed off on—do not survive their first twelve months.
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These people didn’t go from being brilliant to being stupid overnight. They were as smart and skilled at the end as they were at the beginning. It’s just that they were never skilled enough to get the right answers most of the time, probably because almost no one is. It’s natural for us to look at successful people and assume that their success is due to some innate quality they have, rather than to think that it might be the result of circumstance or chance.
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“CEOs should come with the same disclaimer as mutual funds: Past success is no guarantee of future success.”
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But 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.
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Decision markets are well suited to companies because they circumvent the problems that obstruct the flow of information at too many firms:
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“The smart CEOs methodically build a management team around them.”
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11. MARKETS: BEAUTY CONTESTS, BOWLING ALLEYS, AND STOCK PRICES
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Short selling isn’t one of the “great commercial evils of the day.” The lack of short selling is.
The Wisdom of Crowds by James Surowiecki
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one argument often made against behavioral finance is that the more experienced or professional an investor is, the more rational his behavior will be. Yet there’s plenty of evidence that professional investors suffer from many of the same flaws as the rest of us. They herd, they’re 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.
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As long as the deviances from “rationality” are random, the errors will cancel themselves out and the group will still produce the right answer. When the errors are not random but systematic, then markets do a much poorer job of finding a good solution.
The Wisdom of Crowds by James Surowiecki
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It turns out that if people have to take action to opt out of a retirement plan rather than having to take action to opt in, they are significantly more likely to stay in the plan and therefore significantly more likely to save.
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What makes these solutions so powerful is that instead of imposing top-down requirements or mandates, they try to harness people’s preferences in a productive way by offering them more options and by shifting the frames through which people see their own financial lives. By creating the right market structures, they allow collectively more rational behavior to emerge.
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John Maynard Keynes meant when he said that markets can stay wrong longer than you can stay solvent.
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But the healthiest markets are those that are animated by both fear and greed at the same time.
The Wisdom of Crowds by James Surowiecki
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It didn’t matter how individually intelligent the experts were. By the end, they were too much alike to be smart.
The Wisdom of Crowds by James Surowiecki
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During a true bubble, price and value lose all connection. Prices rise because people expect them to keep rising. At least they do until the moment when they don’t. Then comes the stampede for the exit. Bubbles and crashes are textbook examples of collective decision making gone wrong. In a bubble, all of the conditions that make groups intelligent—independence, diversity, private judgment—disappear.
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think about what you’re buying when you buy a share of stock. What you’re buying, literally, is a fraction of that company’s future earnings.
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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.
The Wisdom of Crowds by James Surowiecki
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investors are concerned not just with what the average investor thinks but with what the average investor thinks the average investor thinks.
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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.
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And as investors start mirroring each other, the wisdom of the group as a whole declines.
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1980s, for instance, psychologist Paul Andreassen did a series of experiments with business students at MIT that showed that more news does not always translate into better information.
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Surprisingly, the less-well-informed group did far better than the group that was given all the news. The reason, Andreassen suggested, was that news reports tend, by their nature, to overplay the importance of any particular piece of information.
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The point is that the information skewed the perspectives of the students in a shared way. What the students were told was true. But because it was a truth that seemed to point in one direction—there were probably more beans in the jar than they believed—it destroyed their collective wisdom.
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the best way to disclose public information is without hype or even commentary from people in positions of power.
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Mann found that crowds were most likely to act this way at night, when it was easier not just to go unidentified but also to imagine oneself as part of a bigger group. And the larger the crowd, the more likely it was to scream at the jumper. The bigger the crowd, the easier it was to feel anonymous, to be sure.
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In any crowd of people, Granovetter showed, there are some people who will never riot, and some people who are ready to riot at almost any time—these are the “instigators.” But most people are somewhere in the middle. Their willingness to riot depends on what other people in the crowd are doing. Specifically, it depends on how many other people in the crowd are rioting. As more people riot, more people decide that they are willing to riot, too.
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the more investors who refuse to buy stocks just because other people are buying them, the less likely it will be that a bubble will become inflated. The fewer investors there are who treat the market as if it were Keynes’s beauty contest, the more robust and intelligent the market’s decisions will be.
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12. DEMOCRACY: DREAMS OF THE COMMON GOOD
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“The United States is a tenaciously philistine society,” he writes in Law, Pragmatism, and Democracy. “Its citizens have little appetite for abstractions and little time and less inclination to devote substantial time to training themselves to become informed and public-spirited voters.” And in any case, we should not expect people to be capable of coming up with a workable definition of the common good. “It is far more difficult to form an informed opinion about what is good for society as a whole than it is to determine where one’s self-interest lies,”
The Wisdom of Crowds by James Surowiecki
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But from an economist’s point of view, the perplexing thing is that anyone bothers to vote. After all, your vote has effectively zero chance of changing the outcome of an election, and for most people, the impact any one politician—even the president—will have on their everyday lives is relatively small. If your vote doesn’t matter and the choice of the winner doesn’t make much of a difference either, why vote?
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People vote because they think they should—Riker’s own data on elections from the 1950s suggested that people’s “sense of duty” was the single best predictor of whether they voted or not—and because they want to have a say, however minuscule, in how their government is run.
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there is no clear correlation between self-interest, at least as narrowly conceived, and voting behavior. Most American voters are not wealthy and never will be wealthy. Yet, at least since 1980, they have shown little or no interest in raising taxes on the rich and using the income for their own purposes.
The Wisdom of Crowds by James Surowiecki
90
According to a University of Maryland poll taken in 2002, Americans think the United States should spend $1 on foreign aid for every $3 it spends on defense. (I can’t quite believe that, but that’s what the poll says.) In reality, the United States—which has one of the lowest foreign-aid budgets of any developed country—spends $1 on foreign aid for every $19 it spends on defense. Yet when you ask Americans if we’re spending too much money on foreign aid, the answer has traditionally been “yes.” One reason may be that, as another University of Maryland poll shows, Americans think the United States spends 24 percent of its annual budget on foreign aid. The reality is that it spends less than 1 percent.
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The fact that people don’t know how much the United States spends on foreign aid is no sign of their lack of intelligence. It’s a sign of their lack of information,
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two politicians may both say, and mean, that they are acting in the public interest and then advocate radically different policies. We may agree with one and disagree with the other. But it’s not obvious that we can say that one of them has acted against the common good.
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After all, throughout this book we’ve seen groups that were hodgepodges of ability, engagement, and information produce superior collective judgments. There’s no reason to believe that crowds would be wise in most situations but suddenly become doltish in the political arena.
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At the beginning of this book, I suggested that there were three kinds of problems (cognition, coordination, and cooperation) that groups of people were faced with and that collective intelligence, manifesting itself in very different ways in the face of these different kinds of problems, could help solve.
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Democracy helps people answer those questions because the democratic experience is an experience of not getting everything you want. It’s an experience of seeing your opponents win and get what you hoped to have, and of accepting it, because you believe that they will not destroy the things you value and because you know you will have another chance to get what you want.
The Wisdom of Crowds by James Surowiecki
