Skip to main content

“Wisdom of Crowds” for Effective Decisions

A concept popularized in 2004 by author James Surowiecki, the wisdom of crowds is a theory based on the aggregation of data in groups and their impacts on decision-making. Needless to say, diverse thinking is one of the major contributors to the ability of a group to make better forecasts, predictions, and, therefore, meaningful decisions. While this entire phenomenon has been known as the wisdom of crowds theory for a long time, Surowiecki’s “The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies, and Nations” has managed to popularize the concept over the past decade.

The wisdom of crowds theory depends on two main factors: diversity and talent for good prediction. While diversity plays an important role in shaping up the process, skill is also required in order to combine a crowd of wisdom. This idea entails that people act smart collectively in predicting, making decisions, innovating, and solving problems. Here is everything you need to know about the wisdom of crowds and their impact on effective decisions.

What Is the “Wisdom of Crowds” Theory?

Before diving into the wisdom of crowds definition, we would like to ask you a series of random yet purpose-oriented questions: Is The Shawshank Redemption the best movie ever made, as stated in the IMDB Top 100 list? Is The Lord of the Rings really the greatest work of literature of the past century? While both of these masterpieces have been awarded these titles by public votes, it is safe to say that they are a great example of the wisdom of the crowd phenomenon.

Even though, as a society, we have reached a stage of selfish individualism, it’s still possible to say that a great deal of faith still lies within the judgment of the crowd. There is something to the idea that the masses can make more accurate collective decisions and judgments than expert individuals. So how can we extinguish when the wisdom of crowds theory is right and when it’s wrong? Well, according to James Surowiecki, the wisdom of crowds theory is traced back to an observation by Darwin’s cousin back in 1907. After a “guess the weight of the ox” guessing challenge organized at a country fair, Francis Galton stated that the average of all the entries in the competition have been accurate – beating the alleged cattle experts, as well as most of the individual predictions. This concept marks the essence of the wisdom of crowds theory: the crowd’s average judgment converges on the right solution.

In other words, the wisdom of the crowds’ theory also refers to the result of a very specific process in which independent judgments are statistically combined in order to achieve a final verdict that stands for the greatest accuracy. However, in practice, people are rarely prone to follow solid statistical guidelines when comparing their own predictions with others. Additional factors like seniority, tenure, experience can also lead people to assess some judgments more positively than others. Shouldn’t an expert’s opinion count for more than a novice’s? Don’t you think the boss’s opinion matters more simply because of his status? Well, not in the case of the “wisdom of crowds” theory, and here’s why.

Understanding the Wisdom of Crowds

By now, we have established that the wisdom of the crowds concept is based on a theory where large groups of individuals are collectively smarter than individual experts when it comes to problem-solving, deciding, innovating, and estimating. We also know that writer James Surowiecki hyped this concept with his book published in 2004 by examining how large groups make superior decisions in popular culture, psychology, behavioral economics, and other fields. In addition to this, the wisdom of crowds concept can actually be traced back to Aristotle’s theory of collective judgment as presented in his work named “Politics”. Using a potluck dinner as an example, Aristotle explains that a group of individuals are able to come together and form a more satisfying feast for the group as a whole rather than what only one individual can provide.

In his book, Surowiecki classifies crowd wisdom according to several characteristics. According to Surowiecki, wise crowds have several key characteristics, such as:

  • One person’s opinion should remain independent of those around them (and should not be influenced by anyone else).
  • The crowd should be able to have a diversity of opinions.
  • The crowd should be able to aggregate individual opinions into one collective decision.
  • Anyone taking part in the crowd should be able to make their own opinion based on their individual knowledge.

In addition, Surowiecki elaborates the five essential elements of a wise group as follows:

  • Independence: People’s opinions are not determined by the people around them.
  • Decentralization: People can depend on domestic knowledge and gain expertise in it.
  • Opinion Diversity: Everyone can obtain private information.
  • Trust: Everyone trusts that a group can make an accurate decision.
  • Aggregation: You have to follow a mechanism to turn private judgements into a mutual decision.

Surowiecki’s wisdom of crowds theory has been updated by a 2018 study which suggested that crowds within an existing group have the potential of being wiser even than the group itself. The researchers asked their subjects to discuss the same questions before providing an answer and recorded responses from both individuals and collectively by obtaining small groups that were subdivisions of larger ones. The ultimate research showed that responses from the smaller groups, in which the question was discussed before an agreed-upon, were more accurate than the individual responses. This research has been characterized as an improvement over the existing wisdom of crowds theory.

What Are Some “Wisdom of Crowds” Examples?

There are two main examples that show how the wisdom of the crowds concept works:

  1. By averaging together the individual guesses of a large group about the weight of an object, the answer may be more accurate than the guesses of experts most familiar with that object.
  2. The collective judgment of a diverse group can make up for the bias of a smaller group. While trying to guess the outcome of a World Series game, fans can irrationally favor their preferred team, but a large group that includes plenty of non-fans and individuals who dislike both World Series teams may more accurately predict the winning party.

The Wisdom of Crowds in Business & Management

What can a manager do if she wants to minimize the cost that comes with people’s opinions and to get better judgments? In order to maximize accuracy, members of a team should be able to form independent opinions before coming together and deciding as a group.

Nonetheless, research also shows that group members should also pre-commit to a strategy for combining their opinions. This specific strategy may depend on the type of problem the team faces. Committing to an aggregation strategy ahead of time can shelter groups from the adverse social effects of evaluating each other’s judgments with their own recently-formed opinions in mind.

With quantifiable problems in question, teams should aim for strategies that will remove human reasoning from the aggregation process as much as possible. Teams facing non-quantifiable questions, on the other hand, will have to rely mostly on human aggregation in some form. They should prevent the person responsible for the ultimate judgment from coming up with an opinion of his own before examining the opinions of other team members. While this is not always easy, it highlights an import
ant point: committing to an aggregation strategy for the sake of the wisdom of crowds theory is as much an in-the-moment decision as it is a structural matter.

The wisdom and behavior of a crowd is a captivating process that is omnipresent in the world in spite of its intangible qualities. People are ultimately inclined to judge, operate, live, and decide in crowds. Since humans are sociable creatures, they tend to be much happier when they find that they belong in a crowd. People can make choices and evaluate different things when in groups. From political leaders to fashion trends, there are various decisions that crowds can make that will impact their lifestyle – including wars. People can function quite well in the ecosystem of a crowd, and the crowds can become dangerous and blind when the “independence” and “diversity” factors are eliminated or limited. For successful and happy societies, it is important to harness the crowd’s wisdom and unleash the positive effects of the theory.