Are crowds always wise? Book#79

Ever heard of Francis Galton’s? He was a 20th-century scientist who was surprised 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. Similar experiments were conducted such as with jelly beans in a jar, and they resulted in similar outcomes (video below).

These stories triggered my curiosity, so I picked up this interesting book last year, The Wisdom of Crowds by James Surowiecki. I had read many skeptics on the web asking then why are there countless stories about herd behavior and financial bubbles? Why did Nietzsche say: “Madness of single persons is something rare, but the madness of groups, parties, crowds seems to be the rule”? They have a point too, so if I were the author, I would have changed the title into something like Crowds “sometimes” know best. Because indeed whether a group can guess wisely or not depends on a set of circumstances.

So this book lays the three essential conditions that make up a smart or wise crowd. It needs to have:

1. Diversity of Opinion
   Each person must have a different perspective that he/she brings to the group.
2. Independence of judgment
   People hold to their own reasoning to some degree without being affected by the opinions of others.
3. Decentralization
   Some individuals must be closer to a certain aspect of the problem and hence can draw on their local knowledge.

Since governance is at the heart of everything, these are sound decision making principles to look for in corporate board rooms. They can help avoid group-think bias and herd-like madness. They also contribute to reducing risk since they lessen the reliance on superhero CEOs, miracle workers, and experts. I am guessing that smart capitalists will eventually apply them, and rightfully so, for the benefit of their business ventures.

But the scary part for me is when it comes to the public space. The logical conclusion of the book, that many readers have come to, is that democracy works. But does it? When are crowds opinions really independent? When are we presented with only the facts? Isn’t bias everywhere? Isn’t the media always relaying ideas and thoughts of influencers? How many of us are checking the facts without relying on somebody else’s interpretation? I wish he had more elaborated on that, because if crowds will only be wise when the “independence condition” is met, then aren’t we in trouble ?

My purpose in life is independence, fulfillment and a better understanding of how the world works. Like Charlie Munger, I believe in the discipline of mastering the best that other people have ever figured out. And like Sir Isaac Newton, I believe in our ability to see further than any others before us by acknowledging that we are standing on the shoulders of giants. With this blog, I hope to keep track of my learning about investing, business, decision making, entrepreneurship, and self-development while inspiring others to do the same. For the moment the format of this blog will be one post for each book that has influenced me, but I expect it to evolve over time. This is book number 79 of my journey. Join me now. John.