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The Wisdom of Crowds or of Markets?
BY MATHEW WEINSHELL
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ON THE NIGHT BEFORE THE 2004 PRESIDENTIAL ELECTION,
Jon Zogby, a leading pollster, confidently predicted
a John Kerry landslide. At the same time, two
electronic futures markets, Tradesports.com and the
Iowa Electronic Markets (IEM), indicated that George
Bush’s chances of winning reelection stood at 51 percent,
approximately the percentage of the popular vote
that he in fact captured. While it may be surprising
that groups of gamblers outperformed a well-informed
expert, it actually happens all the time. The IEM has
been more accurate than traditional polls at predicting
the outcome of presidential elections since 1988, when
it was created.
In The Wisdom of Crowds, James Surowiecki argues
that remarkable yet commonplace events like these
prove that under the right circumstances, a “group’s
decisions will, over time, be intellectually superior to
the isolated individual, no matter how smart or well-informed
he is.” Displaying a dizzying ability to jump
between economics, popular culture, computer science,
biology, politics, psychology, and history, Surowiecki
presents abundant evidence for his claim. To him, a
group, and thus a case study, can be anything from a
crowd at a livestock festival to a management team at
NASA, a corporation, or a mass of investors. All of these
groups, he finds, are “wiser” than individual experts.
Surowiecki is not proposing that some kind of
magic powers of intelligence animate groups. To make
wiser-than-individual decisions, he concludes, a group
must have an adequate supply of three qualities: diversity,
independence, and decentralization.
A diverse group is one whose members have different
opinions or perspectives. Independence is the
degree to which a group’s individual members develop
their own opinions, without allowing the opinions of
others to affect them. And a group is decentralized
when its decision-making power is not located in one
place or person. These three conditions allow a group’s
members to draw on their own local and specific knowledge
— even though (in fact, precisely because) nobody
is in charge.
Surowiecki acknowledges that each group member’s
opinions will contain both information and error.
His key move is to claim that, given enough diversity,
independence, and decentralization, the random errors
of group members will cancel each other out. When the
three conditions are satisfied, then, all that will remain
is as much local information as possible, without any
systematic bias that would distort it.
Thus, Surowiecki believes that we should “ask the
crowd” rather than search for the smartest person or the
most respected expert to solve a complicated problem.
Surowiecki impressively documents the pitfalls
of expertise worship. While experts certainly do
exist, their areas of competence tend to be so narrow
that they rarely have enough information to
make expert decisions. “There is no real evidence,”
Surowiecki writes, “that one can become an expert in
something as broad as ‘decision-making’ or ‘policy’ or
‘strategy,’” because decisions involve judgments of the
future — about which nobody can possess very good
information.
Furthermore, as Surowiecki shows, on almost every
topic there is no single, definitive expert, but instead a
large collection of them; and they are likely to disagree
with each other. These disagreements resist resolution
because experts organize their knowledge by leaning on
theories that serve, for all practical purposes, as ideologies.
Since The Wisdom of Crowds appeared, Princeton
University Press has published Philip Tetlock’s Expert
Political Judgment: How Good Is It? How Can We Know?, which impressively documents much
the same point.
Surowiecki recognizes that his case for group
wisdom may be interpreted as an endorsement of
democracy, but he rebuts this interpretation on disappointingly
narrow grounds. He does not believe that
the electorate’s decisions should be presumed wise, he
writes, because the political decisions entrusted to the
people “involve values, tradeoffs, and choices about
what kind of society people should live in,” and those
decisions do not have objective answers. Therefore,
they cannot be considered wise or unwise.
It is indeed true that some political disputes, such
as the abortion controversy, depend on values and are
not really disagreements over facts. But despite the
hullabaloo over “values voters,” most political decisions
involve choices about the means to achieve agreed upon
ends, like economic prosperity, a functional education
system, and military security. It’s possible, then,
that Surowiecki’s thesis is even more ambitious than
he admits. It may be that his argument is not merely
neutral about mass democracy, but subversive of it. For
when factual issues are at stake, the democratic “crowd”
may be just as clueless as a so-called expert.
Unlike most writers, Surowiecki acknowledges the
public’s overwhelming ignorance of facts that might be
germane to deciding the best policy to achieve given
objectives. Then again, according to his theory, as long
as the three conditions hold, the members of a group
don’t need to be well informed for them to make wise
collective decisions; so maybe the electorate’s ignorance
shouldn’t be taken to undermine democracy even
when it comes to policy decisions that demand knowledge
of facts. Why shouldn’t an electorate that meets
Surowiecki’s three conditions reach wise decisions?
Unfortunately, almost all of Surowiecki’s examples
of group wisdom involve crowds of relatively informed
people solving simple problems, such as determining
the number of jellybeans in a jar or the weight of a
slaughtered ox. This type of evidence doesn’t suggest
that groups of uninformed people will necessarily do
well at solving complicated problems, such as those that
democracy poses when it asks “the crowd” to decide on
fiscal, military, or education policy.
The evidence that comes closest to suggesting that
groups of ordinary people can outperform experts is the
impressive performance of markets. In fact, the success
of markets is what motivated Surowiecki, a New Yorker business journalist, to study the concept of collective
wisdom in the first place. But while markets do allow
imperfectly informed and fallible people to produce collectively
wise decisions, it doesn’t follow that the same
people, as voters, will also make wise decisions. The
reason is that Surowiecki’s three conditions of diversity,
decentralization, and independence aren’t enough to
explain the wisdom of market crowds.
To use one of Surowiecki’s examples, none of the
consumers who contributed to the triumph of the
gasoline-powered car in the early 1900s needed to
know how the car or the alternatives to it worked; they
could have been uniform in their opinions about that,
and their opinions might have been uniformly wrong,
but collective wisdom would have still emerged. All
that’s necessary to correct a mistaken group opinion
in markets is the ability of members of the group to
try different alternatives. The wisdom of the crowd in
Surowiecki’s example consisted of people’s ability to
draw on the local knowledge gained from experimenting
with different types of car, if they didn’t like the first
one they tried. But if you’d asked any of the individual
car buyers why their experience had shown that gasoline
engines worked better than the alternatives, very
few of them would have been able to supply a correct
answer. If you put such a complex question to the whole
group — as elections do — their answer probably would
have been wrong.
Even a diverse, independent, and decentralized
group wouldn’t have been likely to guess right about
which type of engine was best unless they had already
been able to experiment with different answers. Prior
to their experience with different engines, posing that
question to the crowd would have been like asking members
of today’s public to guess at which theory of the
origins of the universe is true: the probability that the
crowd would guess correctly is minuscule, because their
opinions would be uninformed by experimentation.
The advantage of markets, then, is not that by
virtue of their diversity, independence, and decentralization,
they make people more knowledgeable about
complicated topics. The advantage is that experimentation
— or what market ideologues call “freedom of
choice” — makes each consumer’s evolving local knowledge
of his or her own “preferences” suffice, regardless
of how poorly informed he may be about the more
complex question of how to satisfy those preferences.
Different entrepreneurs provide different answers to
that question, and without knowing anything about
these different answers except how well they perform
in the consumer’s experience, the crowd of consumers
mimics wisdom without actually becoming knowledgeable
about those answers. (It’s the entrepreneurs — not
the crowd of consumers — who have to be diverse, independent,
and decentralized, so that the consumers have
different choices among which to experiment.)
Surowiecki claims that errors are random, and
cancel each other out, so that the truth tends to prevail
in the form of mass opinion. But the weakness of his
book is in never examining the mechanism that ensures
the canceling out of errors, and thus the emergence of
truth — even under the conditions he specifies. It can’t
be that the randomness of error alone ensures that
“truth will out,” since no given opinion is as likely to be
true as to be false. If there is only one truth but there
are many opinions, most of them will be wrong, by
logical necessity. The chance of somebody arriving at a
given error may be random, but all those randomly generated
errors will dwarf the truth, since the chance that
someone will arrive at it is equal to the chance that they
will arrive at any one among many possible errors.
Of course, there are degrees of truth and degrees of
error. But what is the mechanism to pick out the most true
opinion from the crowd of more-mistaken ones?
The scientist’s mechanism is laboratory experimentation.
The market’s mechanism is a less controlled, but
still effective, version of the same thing: the purchases
of consumers, who can decline to repeat purchases if
they’re dissatisfied with the first one. Consumers’ initially
mistaken opinions about a very limited, simple
topic — which product they will like — are corrected by
their ability to “change their minds” and try alternatives
if they don’t like the initial results. Best of all, their
opinions about the question of what they prefer don’t
need to be informed by anything but direct experience.
Thus, their opinions about, say, automotive design can
be completely wrong — as they surely will be, in most
cases — but they can still unwittingly choose cars that
have the best engines.
Contrast the situation in markets with the situation
in politics. Imagine that instead of billions of consumer
experiments happening every day, all Americans got one
bundle of products every two or four years. That’s what
mass democracy is like, when the “products” in question
are public policies. The citizens of a democracy have no
individual ability to experiment with alternative policies,
and this reduces to the vanishing point their ability
to gather evidence that would let them recognize,
let alone reverse, their mistakes. In a democracy, the
crowd acts as one. Everyone must follow the majority,
and if things seem to be going badly, it’s just a matter
of opinion whether the minority’s policies would have
done any better. Everything now does boil down to how
well informed people are about arcane matters — such
as the cause of recessions or of wars going badly.
Political decision makers have to decide issues of
social causation, not through direct experience akin
to buying a lemon from Chevrolet and trying Toyota
next time — social causation is too complicated for
that — but by assessing abstract economic, sociological,
and historical theories of the sort that divide even
scholars in those fields. Lacking experimental evidence
on these questions, the electorate must turn to its opinions,
and every study has found these to be woefully
uninformed.
Here is where Surowiecki is more subversive than
he recognizes. His evidence of expert disagreement
should give pause not just to Platonists, but to democrats.
If rule by experts is a non-starter because there
are few experimental correctives to ideologically biased
expert judgments, the same is true of the political judgments
of the crowd. As long as the best opinion is outnumbered
by worse opinions — again, a logical necessity
if, indeed, opinions are diverse — then there needs to be
some mechanism to weed out all those bad opinions if
democracy is to produce wise policy decisions. But if
experimentation serves that function in markets and
in (natural) science, then such a mechanism is sorely
missing in politics. Whether we’re ruled by the few or
the many, in politics we’re ruled by somebody’s opinion,
and if that opinion is uninformed by experimentation,
then it isn’t likely to be correct. Surowiecki’s book can
therefore be read as an argument not about experts
against crowds, but about rule by opinion — the expert’s
or the crowd’s — against rule by experience, grounded
in experimentation.
All political decisions, for lack of experimentation,
will tend to be made by unchecked opinion. But not
all decisions need to be political. Military strategy, perhaps.
But school pedagogy, road construction, cable TV
licensing, employment practices, consumer protection?
In each area that’s governed politically, a legal monopoly
imposes one opinion about the best public policy on all
residents of the jurisdiction. This means that erroneous
opinions are likely to prevail, and that errors are
unlikely to be weeded out, because erroneous opinions
are commonplace, and experimentation is banned by
law. If individuals were freer to choose among employers,
schools, and so on, they’d be able to discover their
mistakes by generating “local knowledge” about what
works and what doesn’t — without having to become
pedagogical experts or traffic engineers.
Perhaps this means we should research trading
political decision-making mechanisms for market
mechanisms, or even transforming the former into the
latter. By bringing attention to the problem with relying
on (expert) opinion, and by pointing out the relative
wisdom of markets, Surowiecki’s book is a commendable
and fascinating first step on this path.
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| Matt Weinshall graduated from Harvard in 2002. |
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