Trying Out the Wisdom of Crowds

"Summer Reading" is usually more of a wish than an accomplishment. But I managed a lot this summer; indeed my June Amazon shipment is wholly depleted.

I like to read two or three related books in tandem, for the joy of serendiptity. That doesn't always work, but in July it did, and in a odd corner: how crowds, individuals, and society collaborate and "know".

The Wisdom of Crowds: Why the many are smarter than the few and how collective wisdom shapes businesses, economies, societies and nations. James Surowiecki. Short take: a collection of people with ordinary knowledge will generally make better decisions than any expert.

The Company of Strangers: A natural history of economic life. Paul Seabright. Short take: Most primates are only minimally social. Man figured out reciprocal trust, which allows anonymous transactions.

Blink. Malcolm Gladwell. Short take: if you know (about) what you are seeing, your first instinct is is the right one. If you stop to analyze, you may well go wrong.

I won't give longer reviews; all three have been reviewed to death, by better critics.

A common theme:  Surowiecki and Seabright both support the idea that "financial" markets, composed of independent  "traders"  are better predictors of future results than TV pundits.

One of the markets they cite is NewsFutures, where a punter can "bet" on outcomes of current events: Will Schroeder stay on as German Chancellor? Will a hurricane hit Texas before November 30? Will John Roberts be confirmed?

The thinking is that players, who have definite, though small, financial incentives to bet correctly, will, as a group, bet correctly. No individual will have the "answer". But the collective smarts of 20,000 individuals, with money or rewards at stake, should be a good guide.

As an example, let me show you where I am. I have a stake in NewsFutures. Here was my status a few hours ago:

As you can see, I'm backing Schroeder heavily to be re-elected Cerman chancellor. I'm spitting in the wind, obviously, but the Danish, Norwegian, and Swedish papers -- all of whom traditionally have very, very good sources in Berlin, are tipping a Schroeder government.

Right? Wrong? I don't know. The "market" seems to think I am wrong (but since I took this screen shot, the shares have jumped from X$9 to X$29... as the US papers start to pick up on the European analysis.)

I also have a stake in Yahoo's TechBuzz Game. Here, I am on less solid ground, since I am not privy to tech buzz. But I have spotted a hole: there's a hurricane market. Meteorology fascinates me; and weather that affects the South deeply concerns me.

So here I've confidently invested in Rita and Stan (who doesn't exist, yet).

Rita is going to be all over the papers for a week or more. Stan will or won't develop. Still, I won't lose much by giving him a wager.

Now, if you've stayed with me this far, you may be thinking one of two things:

What are the moral implications of "betting" on hurricane strikes (or whatever)? None, that I can see. I don't cause a hurricane strike; indeed, if it looks like the hurricane will die out, I'll take the other position.  I've flipped on the Schroeder thing twice. I lost my butt on Phillippe.

Takeaway: the market is heartless & makes better decisions when it is heartless.

But you aren't affecting anything. Nope, just reacting with great interest.

Takeaway: the "market", given its incentives, is a better news gatherer than any professional news gatherer.

I have a lot of links to fill in here, and will do so over the next day. In the meantime, a Google Search will probably get you where you are going

Posted by Allan Jenkins on September 19, 2005 at 07:56 PM in Books, Communication, Desirable Roasted Coffee, Ethics, Gadgets & Toys, Smart Communities, Social Tools, Society | Permalink

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