Wisdom Of The Crowd Theory: 12 Amazing Examples

 

The wisdom of the crowd is built of a group - in the image, a group of people is walking in the street.

Undoubtedly, prediction and diverse thinking contribute to the ability of a group to make exact forecasts and predictions. This entire phenomenon is famous as the wisdom of crowds. It happens if a gathering of individuals has better accuracy as compared to individuals themselves.

 

The wisdom of the crowds depends on two critical factors, such as diversity and talent for good predictions. Diversity plays an important role, along with skill. It is an idea where people act smart collectively in problem-solving, predicting, innovating, and decision making.

The concept of the "Wisdom of Crowds" got popularity in 2004 from the book of James Surowiecki. The book was published with the title "The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies, and Nations." This book is about the aggregation of data in groups and their impacts on decision-making.

 

The wisdom of the crowd book by James Surowiecki

 

The book presents several anecdotes and case studies to support their arguments. Basically, the book tries to prove the importance of large groups to make superior decisions in psychology, behavioral economics, biology, and pop culture.

 

Remember, the wisdom of crowds is an old idea. It depends on the theory of Aristotle for collective judgment. He used the example of potluck dinners to explain. A group containing different people can produce a satisfying feast as compared to an individual.

A crowd may not always be wise because some of the people may have the opposite opinion—for example, hyperactive investors in the bubble stock market and dot-com companies in the 1990s. The bubble crowd invested according to speculation of profitability in internet startups shortly. Stock prices of numerous of these companies soared instead of generating revenue.

 

James Surowiecki

 

What is the wisdom of the crowd - definition?

The wisdom of the crowd refers to a procedure considering the collective opinion of individuals in a group. In this process, experts are not necessary to answer. Aggregated answers must depend on quantity estimation, spatial reasoning, and general knowledge.

 

A group made of diversified individuals.

 

Characteristics of Wise Crowds

As per Surowiecki, you can identify a wise crowd according to its several characteristics. For instance, the crowd must have diversity in opinions. The opinion of a person must be independent of the people around him. Everyone in a crowd must have the ability to make his/her opinion according to his/her knowledge. The crowd must have the ability to aggregate the opinion of each individual in a collective decision.

In 2018, the wisdom of the crowd theory was updated because a new study suggested that crowds in current groups are wise compared to the crowd itself. It is known as an improvement on the contemporary crowd wisdom theory. The researchers recorded the responses of individuals by asking private questions.

 

Wisdom Of The Crowd Theory: Types

Surowiecki classifies crowd wisdom into different types, such as coordination, cooperation, and cognition.

 

Cognition

Information processing and thinking, even market judgment, can be faster and reliable. It must be free from political fears as compared to deliberations of expert committees and experts.

 

Cooperation

It means a pattern of people forming trust networks without a central system to control their behavior and enforce their compliance directly. It is a pro-free market.

 

Coordination

Behavior and coordination include augmenting the use of a famous bar and not striking in moving the flow of traffic. The book replete with experimental economics, but coordination depends on natural experiments. Pedestrians optimize the flow of pavement and crowding extent in famous restaurants. The author examines the common understanding in culture for accurate judgments for particular reactions of people from other cultures.

 

An illustration of a person processing is opinions.

 

Wisdom Of The Crowd Theory: Criteria

 

There are five essential elements required in a wise group (crowd), such as crazed investors or mobs in bubble stock markets. The main criteria include:

 

Independence

Opinions of people are not determined by the people around them.

 

Decentralization

People can draw on domestic knowledge and specialize in it.

 

Opinion Diversity

Everyone must have private information, even eccentric explanations of famous facts. 

 

Trust

Every person trusts that a group can make a fair decision.

 

Aggregation

To turn private judgments into a mutual decision, you have to follow a mechanism.    

 

A diversified group of people is sitting on the grass and talking.

 

Eight Conjectures About Surowiecki Theory

To understand the wisdom of the crowd theory, here are some famous conjectures from the Oinas-Kukkonen that are based on Surowiecki’s book.

 

  1. You can describe the thinking style of people in a group.

  2. In numerous cases, groups become intelligent and smarter than the smartness of people in a group.

  3. A group must have decentralization, independence, and diversity.

  4. The most adequate decisions can be a contest and disagreement product.

  5. Data aggregation functionality is necessary.

  6. Sometimes, more communication can make the crowd less smart as they influence each other.

  7. The accurate data must be delivered to the perfect people, at the perfect time, in the right location, and in the best manner.

  8. The final decision should not need an expert.

 

Sir Francis Galton

Discussion on the wisdom of the crowd theory is incomplete without Sir Francis Galton. He was a polymath, psychologist, sociologist, statistician, geographer, tropical explorer, proto-geneticist, psychometrician, meteorologist, inventor, eugenicist, and anthropologist. In 1907, he questioned 787 villagers about the weight of one ox.

The answer to each villager was different and wrong. But Galton averaged these guesses and perfectly estimated the weight of one ox. It is a classic example of the wisdom of the crowds. In crowds, people can pool their capabilities to display collective intelligence. This example was repeated several times with a different object.  

 

Sir Francis Galton

 

12 Real Amazing Examples of Wisdom of the Crowds

The wisdom of the crowd is beneficial for management teams. Remember, they have to make sense of complicated questions. They have to work on the growth of the market to get a competitive edge over their competitor. They can follow the wisdom of the crowds to make the best decision.

By averaging guesses of each individual in a huge group about the size or weight of an item, the answer can be accurate. Remember, experts cannot beat the wisdom of the crowds, even with their experience and expertise.

Read & discover the 12 wisdom of the crowd examples:

 

1. Collective Judgment

The collective wisdom of a diversified group may compensate for the biases of a tiny group. To guess the outcomes of an online game, fans can be biased irrationally towards their team. On the other hand, large groups may have several non-fans, and people who do not like world series teams may accurately predict their winner.

 

A diversified group of people looking up and clapping.

2. Financial Markets

Financial markets prove helpful to explain the wisdom of crowds because these have inefficient and efficient people at the same time. If participants are not diverse and lack incentives, the market will become ineffective. The price of items may be different than their value.

As per Barry Ritholtz, future markets and predictions lack the wisdom of crowds as compared to the services and goods market. These markets do not have a diverse or large participant pool. He is a columnist and wealth manager; therefore, his predictions were valuable.

He notices that prediction markets are spectacularly unsuccessful in guessing the outcomes of different events, including the Greek referendum. The individuals are predicting the outcomes of possible events by guessing according to data of public polling. They lack collective knowledge and individual data.

It is difficult to follow specific metrics to find out smart individuals. Things may not be right if the crowd has an awareness of other's ideas. Poor judgment may increase the chances of poor decision-making. This factor could be an important reason for the financial crisis of 2008. In the case of democracies, this pattern may increase the chances of electing the wrong leaders.

 

A stock market graph.

 

3. Crowds May Make the Best Decisions

The weight of evidence is important, from jelly beans to cattle guessing contests. From the policy and business worlds, the example of Galton has a wow factor. It contains a truth grain because groups predict accurately as compared to individuals. The group may have wise individuals for a predictive context. As a result, it verifies maximum accuracy as compared to individuals.

Sometimes, decisions may resonate with the actual experiences. It is common in your daily life to make estimated decisions. Everything can be accurate from your weight, height, and marks. A crowd should have the ability to make better estimates. Crowds can make accurate predictions, but they may be way off.

It is essential to find out the right time for crowds to predict. Diversity plays an important role in crowds to make accurate predictions.

 

4. Tackle Different Types of Problems

A person can accurately guess the number of jelly beans in one packet. The answer can be close to the perfect number. Occasionally, a person can guess a close answer. You can repeat this experiment with more than one person and get accurate answers. The findings may be counterintuitive.

Collective wisdom may use three types of problems, and complications may not be a hurdle, such as cognition problems, cooperation problems, and coordination problems. Cognition problems may increase if you can guess an answer about jelly beans. You may be able to guess right.

Moreover, coordination refers to your coordinated behavior with others. You should stay in the flow to find out the answers of maximum people. Cooperation issues are related to distrustful and self-interested people working together. You have to narrow down self-interest to dictate the participation of an individual in politics.

Sociologists and behavioral economists have gone outside the anecdotic and studied the problems systematically. They get numerous surprising answers. The use of collective wisdom proves helpful to solve different cognitive issues. There are four applicable conditions: suitable aggregation mechanisms, decentralization of experience, independence of judgment, and diversity of opinion.

 

5. Research into Crowds

Research in crowds study has application in three different categories. The common application is the prediction market, betting, or speculative markets created for verifiable predictions. Paddy Power Betfair of Dublin is a bookmaker unit of Flutter Entertainment. It is the biggest exchange in the world.

Information or prediction markets ask different questions, such as winning probability in elections, predicting outcomes, etc. It is not easy to predict individual answers, such as whom a person will vote for.

Prediction markets may interpret the prices of the current market. The decision may depend on the probability of events occurring or the expected value of parameters. The cash value of assets is related to particular outcomes about the winning probability of a candidate or parameters, such as the revenue of the next quarter.

The Delphi method is another application designed by Rand Corp. in the 1950s. It is an interactive, systematic forecasting method that relies on independent experts. These rounds include expert answer questionnaires in different rounds. After every round, an implementer offers an unidentified summary of reasoning and forecasts from other previous rounds.

Participants can revise their old answers according to the reviews of group members. Several answers may be narrow and get coverage of a group toward a perfect answer. Numerous consensus forecasts may be accurate as compared to predictions by individuals. Human swarming is an important method to unleash the wisdom of the group.

 

6. Human Swarming

It is an augmented method to unleash the wisdom of the crowd. The approach implements instantaneous reaction loops around special synchronous groups. The purpose of these groups is to achieve accurate insights from minimum people. Model of human swarming is introduced after biological procedures in insects, fish, and birds.

In this method, a user network uses mediating software tools or intelligence platforms. This system permits groups to behave similarly to unified intelligence. Financial markets are working in the same way. Their functions are similar to ant colonies and beehives.

Collective intelligence has the chance of failure because centralization may increase the chances of biased results. It can cripple intelligence at the time of decision-making based on individual judgment. As a result, the advantage of aggregating private information may diminish. Moreover, sampling error may increase the chances of failure.

If you sample from a different distribution, it may be the reason for collective hysteria. Furthermore, a homogenous crowd can be biased. Diversity proves helpful to ensure variance in the sampling approach. A rational bubble is another example of crowd failure. Cooperation and collective cognition fail because of a too conscious crowd about the opinion of others.

 

7. Crowds in Market

Columnist and wealth manager Barry Ritholtz in 2015 argued that markets for services, goods, and equities are different than futures and prediction markets. Remember, futures and prediction markets lack the wisdom of the crowds. They do not have a diverse and large enough pool of participants.

According to Barry Ritholtz, prediction markets spectacularly failed in guessing the outcomes of different events. Some unexpected events are the Greek referendum in 2015 on bailout European Union and the resignation of Purcell in 2005.

People trying to forecast the outcomes of unexpected events were guessing according to polling data of the public. The process lacked collective knowledge and unique individuals. Research in crowds explains different elements that can make markets inefficient and efficient. Portfolio diversification can decrease market risk because it is a powerful tool. It is not sufficient for the protection of investors from systemic failures.

 

A crowd in a concert.

 

8. Monetary Meltdown

People may not need a warning about the risks of herding amid poorly informed decision-makers. Copycat behaviors are widely regarded as primary contributing factors to the financial crisis. Remember, detrimental herding impact is greater to solve problems without objectively correct answers. It will explain the method of democratic countries to elect astonishingly incompetent leaders.

Undoubtedly, a wise crowd can make the best decision. There are numerous situations where little knowledge can be dangerous. For this reason, diversity, knowledge level, and interest are important elements before wisdom.

 

9. Intelligence Upgrade

Researchers were focusing on making a crowd wise by using collective intelligence. For this reason, they refine a statistical definition for a wise crowd. Judgments of some crowds may be better than selected individuals. The new definition proves helpful for researchers to improve the wisdom of groups by developing guidelines.

It may be useful to add random people to make unrelated decisions, but a group needs individuals instead of independent thinkers. In short, diversity undermines independence. For accuracy, add people who may have a strong disagreement with a group. Your activities may impact the selection of politicians and managers.

 

10. Make the Best Decisions

What will be the decision of the manager for the best judgment and decrease the expenses? These expenses are unavoidable if someone is adamant about his opinion. Strong evidence can decrease accuracy. Members of a team must develop independent opinions to work as a team or group. Remember, decision-makers groups must pre-commit to strategies to combine their opinions.

The particular strategy may vary according to the question types for a team. Moreover, committing to aggregation strategy before time may protect teams/groups from the negative consequences of appraising judgment of each other. Your decision may influence evaluating judgment according to previously developed opinions.

 

11. Independence of Judgment

Judgment independence is important, but you cannot achieve it easily. Humans tend to herds, and it is safe to follow a particular, rational strategy instead of other options. Information cascade cases may blindly follow early adopters instead of evaluating their judgment.

You cannot say that every information cascade is bad because intelligent imitation acts as a rational response to your cognitive limits. Available time can impact this response. Children impulsively imitate their elders and parents because their survival becomes proof that they are doing the best things. The importance of a decision may impact the survival of cascades.

 

A man standing, raising his hands, and looking forward celebrating is independence.

 

12. Decentralization

Undoubtedly, decentralization is vital for appropriateness, independence, and diversity of judgments. Aggregation of data is ironically essential for decentralization success. If the process of aggregation creates biased filters, it can lose the effect. Markets will follow superior neutral mechanisms.

Coordination is another problem. You have to solve it without thinking about the negative aspects of your life. A person should focus on the right answer in his opinion and the opinion of other people. At the time of drafting different strategies, diversity yields an optimum outcome. The experience of a person may prove helpful to yield an intelligent answer collectively.

An example of impulsive solutions for coordination issues is a free market mechanism. You will get resources at an affordable price. It is easy to verify experimentally. Several experiments may help people to behave well in customer markets. Remember, they have to behave differently in asset markets and consumer markets.

Nowadays, organizations and societies work on the voluntary cooperation of people. It depends on the inducement, fear, and reflux, along with narrow self-interest. Modern societies may not cooperate as per their thick relationships, such as ethnic groups and family circles.

Cooperation and coordination need inner fairness that might come in everyone genetically. It may depend on strong reciprocity (willingness to reward good and punishing bad) behavior. No doubt, the shadow of your future can give our decisions a fair sense.             

Sense of fairness becomes important with the shadow of the future. The Self-behavior of a person can impact the entire decision. Capitalism is a social system, and capital accumulation needs transparency and trust. As a result, specialization and labor division will become necessary.

 

Final Verdict

The behavior and wisdom of the crowd is a captivating process. It is omnipresent in the world despite its intangible qualities. Ancient and modern times prove similar human behavior. People are habitual to judge, operate, live, and negotiate in crowds. Undoubtedly, humans are special sociable creatures, and they can swim happily in a crowd.

In groups, people can communicate, make choices, and evaluate different things, from political leaders, lifestyle choices to fashion trends. Moreover, wars in crowds are famous among humans. This economy needs interlocking crowds in markets. In fact, the crowd is shaping each corner of human life, from social activities to financial markets and democratic politics.

Surprisingly, individuals that form crowds are imperfect. These people can work well in the ecosystem of a crowd because of independence and diversity. This situation may tap private specific information, and crowds become wise and intelligent. If these conditions are eliminated or limited, crowds may become blind, dangerous, and foolish.

Homogenous crowds have cognitive biases that may weaken the predictive ability of crowdsourcing. Moreover, a crowd may become lethal if emotions seize it because they can lose their judgment and thinking ability. For successful, prosperous, and happy societies, it is important to harness the wisdom of the crowd. Things can be difficult, but you have to do it smartly to unleash the wisdom of the crowd.

 

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