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The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations, first published in 2004, is a book written by James Surowiecki about the aggregation of information in groups, resulting in decisions that, he argues, are often better than could have been made by any single member of the group. The book presents numerous case studies and anecdotes to illustrate its argument, and touches on several fields, primarily economics and psychology.The opening anecdote relates Francis Galton's surprise that the crowd at a county fair accurately guessed the weight of an ox when their individual guesses were averaged (the average was closer to the ox's true butchered weight than the estimates of most crowd members, and also closer than any of the separate estimates made by cattle experts).The book relates to diverse collections of independently-deciding individuals, rather than crowd psychology as traditionally understood. Its central thesis, that a diverse collection of independently-deciding individuals is likely to make certain types of decisions and predictions better than individuals or even experts, draws many parallels with statistical sampling, but there is little overt discussion of statistics in the book.Its title is an allusion to Charles Mackay's Extraordinary Popular Delusions and the Madness of Crowds, published in 1841.// Types of crowd wisdomSurowiecki breaks down the advantages he sees in disorganized decisions into three main types, which he classifies as: Four elements required to form a wise crowdNot all crowds (groups) are wise. Consider, for example, mobs or crazed investors in a stock market bubble. Refer to Failures of crowd intelligence (below) for more examples of unwise crowds. According to Surowiecki, these key criteria separate wise crowds from irrational ones: Failures of crowd intelligenceSurowiecki studies situations (such as rational bubbles) in which the crowd produces very bad judgment, and argues that in these types of situations their cognition or cooperation failed because (in one way or another) the members of the crowd were too conscious of the opinions of others and began to emulate each other and conform rather than think differently. Although he gives experimental details of crowds collectively swayed by a persuasive speaker, he says that the main reason that groups of people intellectually conform is that the system for making decisions has a systematic flaw.Surowiecki asserts that what happens when the decision-making environment is not set up to accept the crowd, is that the benefits of individual judgments and private information are lost and that the crowd can only do as well as its smartest member, rather than perform better (as he shows is otherwise possible). Detailed case histories of such failures include: Is it possible to be too connected?Surowiecki presented a session entitled Independent Individuals and Wise Crowds, or Is It Possible to Be Too Connected?He recommends:Keep your ties loose.Keep yourself exposed to as many diverse sources of information as possible.Make groups that range across hierarchies.Tim O’Reilly and others also discuss the success of Google, wikis, blogging, and Web 2.0 in the context of the wisdom of crowds. ApplicationsSurowiecki is a very strong advocate of the benefits of decision markets and regrets the failure of DARPA's controversial Policy Analysis Market to get off the ground. He points to the success of public and internal corporate markets as evidence that a collection of people with varying points of view but the same motivation (to make a good guess) can produce an accurate aggregate prediction. According to Surowiecki, the aggregate predictions have been shown to be more reliable than the output of any think tank. He advocates extensions of the existing futures markets even into areas such as terrorist activity and prediction markets within companies.To illustrate its thesis, he says that his publisher is able to publish a more compelling output by relying on individual authors under one-off contracts bringing book ideas to them. In this way they are able to tap the wisdom of a much larger crowd than would be possible with an in-house writing team.Will Hutton has argued that Surowiecki's analysis applies to value judgments as well as factual issues, with crowd decisions that "emerge of our own aggregated free will astonishingly... decent". He concludes that "There's no better case for pluralism, diversity and democracy, along with a genuinely independent press."Applications of the wisdom-of-crowds effect exist in three general categories: Prediction markets, Delphi methods, and extensions of the traditional opinion poll. Prediction marketsThe most common application is the prediction market, a speculative or betting market created to make verifiable predictions. Surowiecki discusses the success of prediction markets. Similar to Delphi methods but unlike opinion polls, prediction (information) markets ask questions like, “Who do you think will win the election?” and predict outcomes rather well. Answers to the question, "Who will you vote for?" are not as predictive.Assets are cash values tied to specific outcomes (e.g., Candidate X will win the election) or parameter (e.g., Next quarter's revenue). The current market prices are interpreted as predictions of the probability of the event or the expected value of the parameter. Betfair is the world's biggest prediction exchange, with around $28 billion traded in 2007. NewsFutures is an international prediction market that generates consensus probabilities for news events. Several companies now offer enterprise class prediction marketplaces to predict project completion dates, sales, or the market potential for new ideas. Delphi methodsThe Delphi method is a systematic, interactive forecasting method which relies on a panel of independent experts. The carefully selected experts answer questionnaires in two or more rounds. After each round, a facilitator provides an anonymous summary of the experts’ forecasts from the previous round as well as the reasons they provided for their judgments. Thus, participants are encouraged to revise their earlier answers in light of the replies of other members of the group. It is believed that during this process the range of the answers will decrease and the group will converge towards the "correct" answer. Many of the consensus forecasts have proven to be more accurate than forecasts made by individuals. See alsoCollaborative FilteringCollarityCrowd psychologyCrowdsourcingDelphi methodDumb agent theoryEfficient market hypothesisGroupthinkInformation Routing GroupInformational cascadeIowa Electronic MarketsOpen source governancePolicy Analysis Market supported by the author of The Wisdom of CrowdsPrediction marketScenario Voting - a Microsoft application of The Wisdom of CrowdsWho Wants To Be A Millionaire? (The "Ask the Audience" option)Wideband delphi
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