THE WISDOM OF CROWDS
Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations
By James Surowiecki
Doubleday. 296 pp. $24.95
Twenty-five years ago, New York attorneys and fledgling foodies Nina and Tim Zagat were dining with a small group of amateur culinary enthusiasts, complaining about the advice of professional critics. The Zagats proposed an experiment, which they called "organized word of mouth." They would distribute a simple survey to friends, asking them to rate the food, service, price and decor of restaurants and to comment on their experience. The first Zagat dining guide was two mimeographed pages, circulated to the couple's friends.
This year, 250,000 people are registered Zagat surveyors, voluntarily evaluating restaurants, hotels, spas, movies, bars, nightclubs and grocery stores in 45 cities worldwide. Sales figures suggest that consumers value the published collective wisdom. "The New York Restaurant Guide" sells more than 650,000 copies annually.
The Zagats have amassed a fortune on the premise that the shared insight of ordinary consumers is more accurate and reliable than expert opinion. In "The Wisdom of Crowds," James Surowiecki pushes market populism and the case against pundits in new directions, arguing that the aggregated decisions of individuals usually will produce the best solutions to problems of cognition (which have a definitive solution), coordination and cooperation -- even for complex issues such as national security, stock valuation and traffic management, for which there is ample professional or technical intelligence.
"Ask a hundred people to answer a question or solve a problem," he writes, "and the average answer will often be at least as good as the answer of the smartest member. With most things, the average is mediocrity. With decision-making, it's often excellence. You could say it's as if we've been programmed to be collectively smart."
The book jacket reprints H.L. Mencken's famous quip that "No one in this world, so far as I know, has ever lost money by underestimating the intelligence of the great masses of the plain people." But even readers who skip right to the text will know that Surowiecki's thesis is directly at odds with classic concerns about the stupidity of crowds, including those of Charles Mackay, Henry David Thoreau and Gustave Le Bon (who, we learn, "had things exactly backward"). And Surowiecki challenges the contemporary enthusiasm for authoritative experts -- CEOs, money managers, professional sports coaches -- in whom corporate boards, investors and fans entrust their fates. He also defends some unpopular projects, such as open-decision markets where investors can speculate about the state of the Middle East or the location of the next terrorist attack, because they produce and collect potentially useful public opinion.
But Surowiecki, who has fashioned a fascinating financial column in the New Yorker by using cutting-edge social science research to interpret market life, finds ample evidence to support his argument. He writes with command and flair, weaving together entertaining anecdotes from popular culture and business history and accessible summaries of arcane theoretical debates in behavioral economics, sociology and psychology. "The Wisdom of Crowds" is both intellectually challenging and a pleasure to read.
And yet Surowiecki's case for the crowd is ultimately unpersuasive, largely because his theory suggests that the conditions that foster collective wisdom are hard to come by, and his research turns up so many examples where groups go awry.
Surowiecki recognizes that much of what we call history is the story of groups making big and consequential mistakes. He claims that four key conditions characterize wise crowds -- diversity of opinion, independence, decentralization and aggregation -- and shows that there is trouble when any one condition is absent. Take the buildup to the Bay of Pigs invasion, for which "the Kennedy administration planned and carried out its strategy without ever really talking to anyone who was skeptical of the prospects of success." Or the recent march to war in Iraq, during which President Bush marginalized his dissenting Cabinet members. Without diversity of opinion or genuinely independent actors, these presidential administrations lapsed into groupthink, producing bad decisions because members of the team lacked perspective and were discouraged from expressing legitimate concerns.
The importance of both decentralization and aggregated collective knowledge has become apparent during the debate over why U.S. intelligence agencies underestimated the threat of al Qaeda before Sept. 11, 2001, and how to reform them. Surowiecki argues convincingly that dispersed investigative systems are necessary for good intelligence, since they promote diversity, local knowledge and independence. After all, U.S. agents had identified and sounded warnings about suspicious activities in flight schools before 9/11. The problem, he claims, was that the FBI, CIA and National Security Agency had -- and still have -- no good mechanism for aggregating this information, so it never got the consideration it deserved.
Surowiecki believes that, in most cases, capitalist markets are the best mechanisms for collecting knowledge, coordinating action, distributing resources and supporting wise crowds. Never mind downsizing, outsourcing, CEO salaries, income polarization, exploitation and the myth of mean business. "This popular image of capitalism bears only slight resemblance to its reality." Capitalism, he claims, has actually promoted "more trust and transparency, and less self-regarding behavior." Citing research in which social scientists tested their experimental economics games on small-scale societies, Surowiecki reports that "the higher the degree to which a culture was integrated with the market, the greater the level of prosociality. . . . The market may not teach people to trust, but it certainly makes it easier for people to do so."
But capitalism and market activity are not identical, and there's considerable evidence that nations such as the United States and the United Kingdom have lower levels of trust, civic engagement and equality than less capitalistic ones, such as Sweden, Denmark and Norway. Surowiecki also attributes the rise of trust and transparency to the emergence of capitalism without considering the influence of the law, rationalized bureaucracies, public education and other welfare state programs -- all of which play crucial roles in making markets work.
Capital markets also crash regularly, with recurrent booms and busts that experts -- officials, economists and specialized policy analysts -- scramble to manage. Although Surowiecki does a fine job of showing how business reporters, money managers and media-anointed industry experts helped inflate the recent dot-com bubble, he treats cases of such collective madness (and the disasters it generates) as "rare historical moments," rather than as systemic flaws in market-based forms of social organization.
Markets, crowds and democracies work well under the right conditions, and Surowiecki has identified them remarkably well. The trouble is that the right conditions are so difficult to produce and sustain. And, as the history of markets, crowds and democracies shows us, small bursts of collective stupidity can do permanent damage.