The Hindu Business Line : Stop chasing experts and start asking crowds

NOBODY likes crowds. But James Surowiecki thinks otherwise. To him, "many are smarter than the few", as he would explain in The Wisdom of Crowds, published by Little Brown (www.twbg.co.uk) . Did we not see that in action recently when poll predictions by popular experts bit the dust and a faceless people seemed to act with a mind of their own? Collective wisdom shapes business, economies, societies and nations, says the author, and he blends "an amazing variety of disciplines from behavioural economics to biology to cutting-edge computer science" to answer questions such as: Why does the queue in which you're standing always seem the slowest? How does the market know the truth?

The book opens with a weight-judging competition conducted about a century ago: 800 common people tried their luck placed wagers on "what the weight of the ox would be after it had been slaughtered and dressed".

At 85, Francis Galton, still curious at how statistics behaved, analysed the tickets after the event. Average guess of the group was 1,197 pounds, and the ox weighed 1,198. And Galton wrote: "The result seems more creditable to the trustworthiness of a democratic judgment than might have been expected." This `wisdom' is at work "in many different guises", notes the author, citing Google's ability to find the one page among billions of Web pages to satisfy your query, stock market movements, and so on. The effect is all round us, but "it's easy to miss" and "hard to accept". So, why chase the one expert who has the right answer?

Stop hunting and ask the crowd, advises Surowiecki. He classifies problems into three: Of cognition, that have definitive solutions; of coordination requiring members of a group "to figure out how to coordinate their behaviour with each other, knowing that everyone else is trying to do the same"; and of cooperation, involving "the challenge of getting self-interested, distrustful people to work together" as in the case of "paying taxes, or dealing with pollution". Groups work well when they are diverse and independent. "Paradoxically, the best way for a group to be smart is for each person in it to think and act as independently as possible," is a thought to ponder over.

On January 28, 1986 after the space shuttle Challenger blew up, stock market punished within minutes the four major contractors who had participated in the launch, but it was Morton Thiokol's stock that was hit hardest. It took six months for the Presidential Commission to find the company responsible. "The market was smart that day because it satisfied the four conditions that characterise wise crowds," explains the author. "Diversity of opinion (each person should have some private information, even if it's just an eccentric interpretation of the known facts), independence (people's opinions are not determined by the opinions of those around them), decentralisation (people are able to specialise and draw on local knowledge), and aggregation (some mechanism exists for turning private judgments into a collective decision)."

But crowds are not infallible, when `information cascade' hits them, which is when "it becomes rational for people to stop paying attention to their own knowledge — their private information — and to start looking instead at the actions of others and imitate them." Crowd, then, ceases to be informative. "Everyone thinks that people are making decisions based on what they know, when in fact people are making decisions based on what they think the people who came before them knew." And, rather than aggregating individual info, "the cascade becomes a sequence of uniformed choices, so that collectively the group ends up making a bad decision."

Something that explains dotcom bust as also performance of most boardrooms. Moral: Don't just hang your head and dumbly follow the sheep in front.

The new FM is aggressively chasing revenue targets, and evaders are already running for cover. Yet, "in purely economic terms, it may actually be rational to cheat," notes the author, citing the low probability of cheaters getting caught. Tax system, therefore, needs something more than law. What's that? Reciprocity. "Most people will participate as long as they believe that everyone else is participating, too." They are `contingent consenters', in the words of Margaret Levi. "When people start to feel that the policeman is asleep, and when they think others are breaking the law and getting away with it, they start to feel like they're being taken advantage of," is a quote from Michael Graetz.

Have you ever wondered why stock markets jump more than justified by the fundamentals, and why swings in opinion are milder in racetrack betting?

"With football games, elections, Millionaire questions, Google searches, there is a definite answer," explains Surowiecki. "The problem with the stock market is that there never is a point at which you can say that it's over, never a point at which you will definitely be proved right or wrong."

Instead, as John Maynard Keynes said, "Markets can stay wrong longer than you can stay solvent." "You think it's going down, he thinks it's going up." Differences are necessary. Else everybody would be "too much alike to be smart". A book to remember when studying scatter-graphs for lines of best fit.

Economics@TheHindu.co.in

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