Wisdom of Crowds

The Wisdom of Crowds by James Surowiecki

Book notes compiled by Jane L. Sigford
Introduction: When our imperfect judgments are aggregated in the right way
our collective intelligence is often excellent. This intelligence, or what Ill
[Surowiecki} call the wisdom of crowds, is at work in the world in many
different guises. Its the reason the Internet search engine Google can scan a
billion Web pages and find the one page that has the exact piece of
information you were looking for. P. xiv.
The argument of this book is that chasing the expert is a mistake, and a
costly one at that. We should stop hunting and ask the crowd (which, of
course, includes the geniuses as well as everyone else) instead. P. xv.
There are conditions that are necessary for the crowd to be wise: diversity,
independence, and a particular kind of decentralization. P. xviii
Groups work well under certain circumstances, and less well under others.
Groups generally need rules to maintain order and coherence, and when
theyre missing or malfunctioning, the result is trouble. Groups benefit from
members talking to and learning from each other, but too much
communication, paradoxically, can actually make the group as a whole less
intelligent.
While big groups are often good for solving certain kinds of problems, big
groups can also be unmanageable and inefficient. Conversely, small groups
have the virtue of being easy to run, but they risk having too little diversity of
thought and too much consensus.
Diversity and independence are important because the best collective
decisions are the product of disagreement and contest, not consensus or
compromise. P. xix
The best way for a group to be smart is for each person in it to think and act
as independently as possible. P. xx.
Part 1
The Wisdom of Crowds

Random crowds on Who Wants to be a Millionaire picked the right

answer 91% of the timemore than the other avenues of assistance. P.
4
If you ask a large enough group of diverse, independent people to
make a prediction or estimate a probability, and then average those
estimates, the errors each of them makes in coming up with an answer
will cancel themselves out. Each persons guess, you might say, has
two components: information and error. Subtract the error, and youre
left with the information. P. 10

Wisdom of Crowds

Ask a hundred people to answer a question or solve a problem, 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, its often excellence. You could say its as if weve
been programmed to be collectively smart. P. 11
The crowd is especially good in horse racing. The final odds reliably
predict the races order of finish (that is, the favorite wins most often,
the horse with the second lowest odds is the second-most-often
winner. P. 14
Googlesurveying three billion Web pages and finding the right page
quickly is built on the wisdom of crowds. It uses the Page Rank
algorithm first defined by Sergey Brin and Lawrence Page, founders of
Google p. 16
Google is a republic, not a perfect democracy. The more people that
have linked to a page, the more influence that page has on the final
decision. P. 27
The real key of tapping into the wisdom of the crowd is to satisfy the
conditions of diversity, independence, and decentralization. P. 22

Chapter 2 The difference Difference Makes: Waggle Dances, the Bay of Pigs,
and the Value of diversity

Surowiecki gave the example of early automakers to illustrate how

when ideas first come into play, there is a plethora of ideas and styles
which gradually get winnowed. At one time there were around 200
different auto makers
As time passes, the market winnows out the winners and losers,
effectively choosing which technologies will flourish and which will
disappear
And, the experience of Google notwithstanding, there is no guarantee
that at the end of the process, the best technology will necessarily win
(since the crowd is not deciding all at once, but rather over time). P. 26
What is important is diversitynot in a sociological sense, but rather in
a conceptual and cognitive sense. P. 28
What makes a system successful is its ability to recognize losers and
kill them quickly. Or, rather, what makes a system successful is its
ability to generate lots of losers and then to recognize them as such
and kill them off. Sometimes the messiest approach is the wisest. P. 29
Generating a diverse set of possible solutions isnt enough. The crowd
also has to be able to distinguish the good solutions for the bad.
Diversity helps because it actually adds perspectives that would
otherwise be absent and because it takes away, or at least weakens,
some of the destructive characteristics of group decision-making.
Fostering diversity is actually more important in small groups and in
formal organizations that in the kinds of larger collectivesfor a simple
reason: because its easy for a few biased individuals to exert undue
influence and skew the groups collective decision. P. 30
You are better off assembling a group of widely informed people than
allowing one or two experts to make a decision because theres no
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real evidence that once can become expert in something as broad as

decision making or policy or strategy.
What cant be written off, though, is the dismal performance record of
most experts. P. 33
Experts are also surprisingly bad at what social scientists call
calibrating their judgments. If your judgments are well calibrated,
then you have a sense of how likely it is that your judgment is correct.
But experts are much like normal people: they routinely overestimate
the likelihood that theyre right. P. 33
Experts dont always realize they are wrong, and they dont have any
idea how wrong they were.
However well informed and sophisticated an expert is, his advice and
predictions should be pooled with those of others to get the most out
of him. P. 34
Past performance is no guarantee of future results. P. 35 [ IMPORTANT.
NOTE MINE]
Why do we cling to the idea that the right expert [or right curriculum
NOTE MINE] will save us? And why do we ignore the fact that simply
averaging a groups estimates will produce a very good result? We
have bad instincts about averaging. We assume averaging means
dumbing down or compromising. P. 35
We also assume that true intelligence resides only in individuals, so
that finding the right personthe right consultant, the right CEOwill
make the difference. In a sense, the crowd is blind to its own wisdom.
If there are enough people out there making predictions, a few of them
are going to compile an impressive record over time. That does not
mean that the record was the product of skill, nor does it mean that
the record will continue into the future. Again, trying to find smart
people will not lead you astray. Trying to find the smartest person will.
P. 36
The negative case for diversity is that diversity makes it easier for a
group to make decisions based on facts, rather than on influence,
authority, or group allegiance.
Homogenous groups, particularly small ones, are often victims of
groupthink. P. 36 because they can become cohesive more easily
than diverse groups and can insulate themselves from the opinions of
others.
Because information that might represent a challenge to the
conventional wisdom is either excluded or rationalized as obviously
mistaken, people come away from discussions with their beliefs
reinforced, convinced more than ever that theyre right. P. 37
Homogeneity fosters palpable pressures toward conformity that groups
often bring to bear on their members. P. 38 If a person has a diverse
opinion, its easier to change his opinion than to challenge the group. P.
38
Diversity makes it easier for individuals to say what they think.
Chapter 3 Monkey See, Monkey do: Imitation, Information cascades,
and independence.
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Independence is important to intelligent decision making because one:

it keeps mistakes that people make from becoming correlatederrors
in individual judgment wont wreck the groups collective judgment as
long as those errors arent systematically pointing in the same
direction. One of the quickest ways to make peoples judgments
systematically biased is to make them dependent on each other for
information. And Two: independent individuals are more likely to have
new information rather than the same old data everyone is already
familiar with. P. 41 you can be biased and irrational, but as long as
youre independent, you wont make the group any dumber. P. 41
The more influence a groups members exert on each other, and the
more personal contact they have with each other, the less likely it is
that the groups decisions will be wise ones. The more influence we
exert on each other, the more likely it is that we will believe the same
things and make the same mistakes. That means its possible that we
could become individually smarter but collectively dumber. P. 42
Conventional wisdom is not the same as collective wisdom. P. 44
Sticking with the crowd and failing small, rather than trying to innovate
and run the risk of failing big, makes not just emotional but also
professional sense. This is the phenomenon thats sometimes called
herding
Worldly wisdom teaches that it is better for reputation to fail
conventionally than to succeed unconventionally. From John Maynard
Keynes. Yet there is the fact that the crowd is right much of the time,
which means that paying attention to what others do should make you
smarter, not dumber. Information isnt in the hands of one person. Its
dispersed across many people. P. 51
When peoples decisions are made in sequence, instead of all at once,
that is called information cascade. Decisions cascade in relation to
information of others, not what an individual believes. That means that
some people go to a restaurant e.g. , and gives good reviews , then
others follow. But if that initial information is incorrect, that people will
make the wrong decision, simply because the initial diners, by chance,
got the wrong information. P. 54.
The fundamental problem with an information cascade is that after a
certain point it becomes rational for people to stop paying attention to
their own knowledgetheir private informationand to start looking
instead at the actions of others and imitate them. But once each
individual stops relying on his own knowledge, the cascade stops
becoming informative. They think they 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.
Instead of aggregating all the information individuals have, the way a
market or a voting system does, the cascade becomes a sequence of
uninformed choices, so that collectively the group ends up making a
bad decision. P.55
According to Malcolm Gladwell in The Tipping Point certain individuals
mavens, connectors, and salesmenare important in spreading
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ideas. Some people are more influential than others, and cascades (he
calls them epidemics) move via social ties, rather than being a simple
matter of anonymous strangers observing each others behavior. P. 55.
People believe that the ones who have information are the mavens,
connectors and salesman. P. 55
If most decisions to adopt new technologies or social norms are driven
by cascades, there is no reason to think that the decisions we make
are, on average, good ones. Collective decisions are most likely to be
good ones when theyre made by people with diverse opinions
reaching independent conclusions, relying primarily on their private
information. In cascades, none of these things are true.
Effectively speaking, a few influential peopleeither because they
happened to go first, or because they have particular skills and fill
particular holes in peoples social networksdetermine the course of
the cascade. In a cascade, peoples decision are not made
independently, but are profoundly influenced by those around them. P.
57
Sometime we imitate others. In a sense it is a kind of rational
response to our own cognitive limits. Each person cant know
everything.
In the long run, imitation has to be effective for people to keep doing it.
The more important the decision, the less likely a cascade is to take
hold. And thats obviously a good think since it means that the more
important the decision, the more likely it is that the groups collective
verdict will be right.
Information cascades are interesting because they are a form of
aggregating information.
The fundamental problem with cascades is that peoples choices are
made sequentially, instead of all at once. P. 63
One key to successful group decisions is getting people to pay much
less attention to what everyone else is saying. P. 65.
Chapter 4 putting the pieces together: the CIA, Linux, and the art of
decentralization.
What do we mean by decentralization?power does not reside in one
central location, and many important decisions are made by individuals
based on their own local and specific knowledge rather than by an
omniscient or farseeing planner. [Schools are an example NOTE MINE]
p, 71
Decentralizations great strength is that it encourages independence
and specialization on the one hand while still allowing people to
coordinate their activities and solve difficult problems on the other.
Decentralizations great weakness is that theres no guarantee that
valuable information which is uncovered in one part of the system will
find its way through the rest of the system. P. 71
A decentralized system can only produce genuinely intelligent results if
theres a means of aggregating the information of everyone in the
system. [We dont have this in public education. NOTE MINE]

Wisdom of Crowds

Aggregation, paradoxically, is therefore important to the success of

decentralization. P. 75
Decentralized works well in some conditions and not very well under
others. Given the premise of the book decentralized ways of
organizing human effort are, more often than not, likely to produce
better results than centralized ways. P. 75
Its hard to make real decentralization work, and hard to keep it going,
and easy for it to become disorganization. P. 76.
The kind of decentralization led to the lack of ability for security
agencies to coordinate information prior to 911. There was no way to
aggregate and share. P. 77
Chapter 5 Shall we Dance?: Coordination in a complex world
Coordination problem are ubiquitous e.g. what time should you leave
for work? Who will work where?
For coordination problems, independent decision-makingwhich
doesnt take the opinions of others into accountis pointless since
what Im going to do depends on what I think youre going to do.
Theres no guarantee that groups will come up with smart solutions but
they often do.
Even on coordination problems, independent thinkers may be valuable.
P. 89
Coordination problemshard to solve and coming up with any good
answer is a triumph. When what people want to do depends on what
everyone else wants to do, every decision affects every other decision,
and there is no outside reference point that can stop the self-reflexive
spiral. P. 90
Peoples experiences of the world are often surprisingly similar, which
makes successful coordination easier.
Culture also enables coordination in a different way, be establishing
norms and conventions that regulate behavior. Some of these norms
are explicit and bear the force of law.
Most norms are long-standing but it also seems possible to create new
forms of behavior quickly, particularly if doing so solves a problem. P.
92
Conventions obviously maintain order and stability and they reduce the
amount of cognitive work you have to put in to get through the day.
We dont have to think about how to act in some situations and allow
groups of disparate, unconnected people to organize themselves with
relative ease and an absence of conflict. P. 93 e.g. how people seat
themselves in a theater, even if they leave to get popcorn.
The most successful norms are not just imposed externally but are
internalized.
Convention has a profound effect on economic life and on the way
companies do business. Its the way its always been done. [We get
hung up on that in education a great deal. NOTE MINE] e.g. instead of
laying off workers, companies will reduce everyones pay to keep
people working. [Is this an example of value-laden behavior that is a

Wisdom of Crowds

good thing? He really doesnt address values and ethics in this book
and the influence on group behavior from the values/ethical
standpoint. NOTE MINE]
Another example is how movie tickets are priced. Economically, it
makes sense to charge more for newly released films and gradually
decrease price as they have been out a while. Yet we dont do that
because thats not the way its been done since movies were first
made P. 99
In the stock market regular people not brokers-- do as well in the
market as do experts. A well functioning market will make everyone
better off than they were when trading beganbut better off compared
to what they were, not compared to anyone else. On the other hand,
better off is better off. Nave, unsophisticated agents, (Smith) says
that these agents can coordinate themselves to achieve complex,
mutually beneficial ends even if theyre not really sure, at the start,
what those ends are or what it will take to accomplish them. P. 107
Chapter 6: Society does exits: Taxes, Tipping, Television, and trust
Do people think that in an ideal world that everyone would have the
same amount of money? Not it means people think that, in an ideal
world, everyone would end up with the amount of money they
deserved. [Is this a leftover from our Calvinist/Puritan heritage? Is this
true in other countries such as Russia? NOTE MINE]
Impulse toward fairness is a cross-cultural reality, but culture does
have a major effect on what counts as fair. More generally , high
incomes by themselves dont seem to bother Americans mucheven
though America has the most unequal distribution of income in the
developed world, polls consistently show that Americans care much
less about inequality than Europeans do. In fact in America the people
whom inequality bothers most are the rich. One reason for this is that
Americans are far more likely to believe that wealth is the result of
initiative and skill, while Europeans are far more likely to attribute it to
luck. Americans still think, perhaps inaccurately, of the US as a
relatively mobile society, in which its possible for a working-class kid
to become rich. P. 115
Societies and organizations work only if people cooperate. Its
impossible for a society to rely on law alone to make sure citizens act
honestly and responsibly. So cooperation typically makes everyone
better off. But for each individual, its rarely rational to cooperate. It
always make more sense to look after your own interests first and then
live off everyone elses work if they are silly enough to cooperate. So
why dont most of us do just that? [Morals? Ethics? Religious
upbringing? NOTE MINE]
The foundation of cooperation is not really trust, but the durability of
the relationship. The promise of our continued interaction keeps us in
line. P. 117
A good society is defined more by how people treat strangers than by
how they treat those they know. P. 118

Wisdom of Crowds

The benefits of trustthat is, of being trusting and of being trustworthy

are potentially immense, and because a successful market system
teaches people to recognize those benefits. P. 120
Establishing confidence in the reliability of corporations and products
has been a central part of the history of capitalism. P. 121
A defining characteristic of modern capitalism is the emphasis on the
accumulation of capital over the long run as opposed to merely shortterm profit. P. 122
If your prosperity in the long run depended on return business, on
word-of-mouth recommendations, and on ongoing relationships with
suppliers and partners, fair dealing became more valuable.
The sense of trust could not exist without the institutional and legal
framework that underpins every modern capitalist economy. The
measure of success of laws and contracts is how rarely they are
invoked.
Trust begins because of the shadow of the future. All you really trust is
that the other person will recognize his self-interest. It becomes a
general sense of reliability, a willingness to cooperate because
cooperation is the best way to get things done. P. 125
There is a problem as well: the more people trust, the easier they are
for others to exploit. And if trust is the most valuable social product of
market interactions, corruption is its most damaging. P. 126
The t.v. industry with the sweeps 4 times a year is an example of
allowing a single self-interested faction dictate a groups decisions.
Because the programming is different during sweeps, and only some
people are polled, and the results are not aggregated by the local
market, just by the greater market, the key players in the t.v. industry
have allowed a single self-interested group dictate the decision about
programming. P. 134
Taxpaying is a cooperation problem. People will pay as long as they
think everyone else is paying too, even though you can reap all the
benefits of a tax systemeducation, parks, etcwithout paying. A
healthy tax system requires people to pay voluntarily. People also
have to believe that the guilty will be punished for not paying.
Successful taxpaying breed successful taxpaying. P. 141.
Part II
Chapter 7: Traffic: What we have here is a failure to Coordinate

The study of traffic is one that really looks at the behavior of crowds.
Various strategies to reduce traffic flow, e.g. London charging drivers $5.
Each time they come to central London during rush hour has been
relatively successful. Singapore has also had success in using computer
chips and as soon as you enter the pay zones, money is deducted from
your account so drivers are in control. This has been very successful. P.
147
One reason coordination on the highway is so difficult is the diversity of
drivershow people drive, use brakes, leave room between cars, etc. p.
153
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Studies have shown that drivers are uncomfortable giving up control as in

having cars drive for you.
If an intelligent crowd cannot save itself from traffic jams, perhaps
intelligent highways can. P. 157 [by using meters, smart cards, traffic
sensors, etc NOTE MINE]
Chapter 8: Science: Collaboration competition, and reputation

Collaboration among scientists globally is an example of how the power of

a group is stronger than an individual. The discovery that SARS was
caused by a coronavirus was a global collaboration of scientists working
together, literally around the clock and around the globe. Pp 159-160
This collaboration gave each lab the freedom to focus on what it believed
to be the most premising lines of investigation which is an exemplary case
of how much of modern science gets done. P. 161
Scientists collaborate because as science becomes more specialized and
more subfields proliferate, it is difficult for a single person to know
everything he needs to know. P. 161
Collaboration makes it easier for scientists to work on interdisciplinary
problems which happen to be among todays most important and
interesting scientific problems.
Collaboration works because, when it works well, it guarantees a diversity
of perspectives.
Global collaboration like around the SARS virus remains unusual but
Bozeman found that academic researchers spend only a third of their time
working with people who are not in their immediate work group, and only
a quarter of their time working with people who are outside their
university.
The value of working across not only universities but nations is clearly
immense.
Researchers who spend a lot of time working with researchers in other
nations are significantly more productive than researchers who dont.
[University professors need to take heed because they are so caught up
in research, name recognition, etc. See book notes on Innovative
University by Clayton Christensen. NOTE MINE]
Science is collective because it depends on and has tried to
institutionalize the free and open exchange of information. [Why dont
educators do this? NOTE MINE]
When scientists make an important new discovery or experimentally prove
some hypothesis, they do not, in general, keep that information to
themselves so that they alone can ponder its meaning and derive
additional theories. Sharing makes it possible for other scientists to use
that data to construct new hypotheses and perform new experiments.
The assumption is that society as a whole will end up knowing more if
information is diffused as widely as possible, rather than being limited to a
few people. P. 164
Pursuing their own self-interest is more complicated for scientists than it
might sound. While scientists are fundamentally competing for
recognition and attention that recognition and attention can only be
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afforded them by the very people theyre competing against. So science

presents us with the curious paradox of enterprise that is simultaneously
intensely competitive and intensely cooperative. P. 166
The challenge the scientific community faces today is whether the success
of Western science can survive the growing commercialization of scientific
endeavors. P. 167
At the core of the process of accepting new ideas into the common fund of
knowledge is a kind of unexpressed faith in the collective wisdom of
scientists. P. 169
The collaboration with scientists has 2 important pieces. One good
science requires a degree of trust among scientists that even as they
compete, they will also cooperate by playing fair with their data. Second,
science depends not only on an ever-replenishing pool of common
knowledge but also on an implicit faith in the collective wisdom of the
scientific community to distinguish between those hypotheses that are
trustworthy and those that are not. P. 170
The flaw in the way the scientific community discovers truth is that most
scientific work never gets noticed.
Also those scientists who have name recognition are more likely to be
published and read than those who are no known. P. 171 Reputation
should not be the basis of a scientific hierarchy. P. 172
Chapter 9: Committees, Juries, and Tams: The Columbia disaster and
how small groups can be made to work.

Small groups are ubiquitous in American life, and their decisions are
consequential. Boards of directors, juries, etc.
Small groups are different in important ways because the nature of the
relationship in the group is qualitatively different.
Small groups can make very bad decisions because influence is more
direct and immediate and small-group judgments tend to be more volatile
and extreme. P. 176
Few organizations have figured out how to make groups work well
consistently. Its still unusual for a small group to be more than just the
sum of its parts, Much of the time, far from adding value to their
members, groups seem to subtract it. Individuals will go along with others
more readily. The more vocal opinion often gets discussed. P. 177
Members, if there is disagreement, dismiss the need to gather more
information. They may just make a decision. P. 177
They succumb to confirmation bias which causes decision makers to
unconsciously seek those bits of information that confirm their underlying
intuitions.
A team may believe that it knows more than it does.
Small groups have a real danger in emphasizing consensus over dissent.
They prefer the illusion of certainty to the reality of doubt, e.g. Bay of Pigs
decision, p. 180

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One thing that helps is that group deliberations are more successful when
they have a clear agenda and when leaders take an active role in making
sure that everyone gets a chance to speak. P. 182
Paradoxically, Stasser found that in unstructured, free-flowing discussions,
the information that tends to be talked about the most is the information
that everyone already knows. P. 183
Small groups also fall victim to the lack of diversity. Organizations tend to
hire from the same places, have groups of like-minded people. P. 183
Small groups get polarized more readily. People are constantly comparing
themselves to everyone else and they want to maintain their position
within the group and tend to go along with the group or change their mind
more so than in a larger group. P. 185
The order in which people speak has a profound effect on the course of a
discussion. Those who speak earlier are more influential and they tend to
provide a framework within which the discussion occurs. P. 186
Talkativeness has profound effect on the kinds of decisions small groups
reach. If you talk a lot in a group, people will tend to think of you as
influential almost by default. Talkative people are not necessarily wellliked by other members of the group, but they are listened to. And
talkativeness feeds on itself. The more someone talks, the more he is
talked to by others in the group. So people at the center of the group
tend to become more important over the course of a discussion. P. 187
There is no clear correlation between talkativeness and expertise.
Extremists tend to be more rigid and more convinced of their own
rightness than moderates. P. 188
Nonpolarized groups consistently make better decision and come up with
better answers than most of their members, and surprisingly often the
group outperforms even its best member. P. 189
There is no point in making small groups part of a leadership structure if
you do not give the group a method of aggregating the opinions of its
members. If an organization sets up teams and then uses them for purely
advisory purposes, it loses the true advantage that a team has: namely,
collective wisdom. P. 191
Chapter 10 The Company: Meet the New Boss, same as the Old Boss?
No organizational model offers an ideal solution.
Although corporations pay lip service to becoming less hierarchical and
more collaborative, most American corporations did not try to do so.
Collective decision-making was too often confused with the quest for
consensus.
Consensus-driven groupsespecially when the members are familiar with
each other-tend to trade in the familiar and squelch provocative debate.
Top execs are too often isolated from the real opinions of everyone else.
Too often corporations say they are making decisions democratic. They
confuse that democracy means endless discussions rather than a wider
distribution of decision-making power. P. 203
In American corporations the assumptions that integration, hierarchy, and
the concentration of power in a few hands lead to success continue to

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exert a powerful hold on much of American business. While the success of

Silicon Valley companieswhich, in general do have more decentralized
structures with less emphasis on top-down decision makingmad
companies anxious to at least appear to be pushing authority down the
hierarchy, reality has only rarely matched appearance, even though
dramatic improvements in information technology have made the
diffusion of information to large numbers of employees feasible and costeffective.
At the same time, theres not much evidence that the flow of information
up the hierarchy has improved much either. P. 207
One of the things that gets in the way of the exchange of real information
is a deep-rooted hostility on the part of bosses to opposition from
subordinates. This is the real cost of a top-down approach to decision
making: it confers the illusion of perfectibility upon the decision makers
and encourages everyone else simply to play along. P. 208
What makes this particularly damaging is that, people in an organization
already have a natural inclination to avoid conflict and potential trouble.
Compounding this is the fact that managerial pay is often based not on
how one performs but rather on how one performs relative to
expectations. Which tends to lead corporations to falsify results, e.g.
Enron.
Top-down corporations give people an incentive to hide information and
dissemble.
Decisions as much as possible, should be made by people close to the
problem.
Genuine employee involvement remains an unusual phenomenon. P. 212
Although competition has beneficial effects, serious rivalries internally
defeat the purpose of having a company with a formal organization in the
first place. The competition should be with other companies, not between
internal departments. Again Enron had a competition internally. P. 214
Yet, today the CEO makes the ultimate decisions even though companies
pay greater attention to the virtues of decentralization and bottom-up
mechanism, they also treat their CEOs as superheroes. P. 216
Tenure for CEOs is shorter than it had ever been in the 1990s.
Whats perplexing is how little evidence there is that single individuals can
consistently make superior forecasts or strategic decisions in the face of
genuine uncertainty. P. 217
Decisions made by CEOs rarely have clean, measurable outcomes.
Sydney Finkelstein Past success is no guarantee of future success. P.
219
CEOs may have the right skills for the right time but that doesnt mean it
will happen in the next circumstance.
No decision-making system is going to guarantee corporate success
because the decisions are of mind-numbing complexity. We know that
the more power you give a single individual in the face of complexity and
uncertainty, the more likely it is that bad decisions will get made.

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In practice the flow of information with the org. shouldnt be dictated by

mgmt charts. Companies should use ways of aggregating collective
wisdom
Major corporate decisions should be informed by decision markets, not
made by them. The more important the decision, the more important it is
that it not be left in the hands of a single person.
In the face of uncertainty, the collective judgment of a group of executives
will trump that of even the smartest executive. P. 223
Chapter 11: Markets: Equity Contests, Bowling alleys and stock prices

Investors sometimes herd, preferring the safety of the company of others

to making independent decision. They give too much credence to recent
and high profile news while underestimating the importance of longerlasting trends or less dramatic events.
Investors find losses more painfulby some accounts, twice as painfulas
they find gains pleasurable, and so they hold on to losing stocks longer
than they should, believing that as long as they havent sold the stock,
then they havent suffered any losses.
And, above all, investors are overconfident, which means that individuals
trade more than they should and end up costing themselves money as a
result. P. 229
Theres plenty of evidence that professional investors suffer from many of
the same flaws as the rest of us. They herd, theyre overconfident, they
underestimate the impact of randomness, and they explain good results
as the product of skill and bad results as the product of bad luck.
Since the vast majority of money managers do worse than the market as a
whole, its a little hard to see them as paragons of rationality .p. 230
The idea of the wisdom of crowds is not that a group will always give you
the right answer but that on average it will consistently come up with a
better answer than any individual could provide. P. 235
Financial markets are decidedly imperfect at tapping into the collective
wisdom, especially relative to other methods of doing so.
One problem markets have is that theyre fertile ground for speculation.
Problem with the stock market is that there is never a point at which you
can say that its over, never a point at which you will definitely be proved
right or wrong, p. 237
[Stock market] Bubbles and crashes are textbook examples of collective
decision making gone wrong. In a bubble, all of the conditions that make
groups intelligentindependence, diversity, private judgmentdisappear.
Bubbles are really characteristic of what we think of as financial markets
not the real economy as in buying and selling t.v. sets and apples,
The price of a stock often reflects a series of dependent decisions,
because when many people calculate what a stock is worth, their
evaluation depends, at least in part, on what everyone else believes the
stock to be worth. P. 247
Bubbles and crashes occur when the mix [of opinions] shifts too far in the
direction of dependence.

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A crash is simply the inverse of a bubble, although its typically more

sudden and vicious. In a crash, investors are similarly uninterested in the
real value of a stock, and similarly obsessed with reselling it.249
The insidiousness of a bubble, is that the longer it goes on, the less bubble
like it seems. Part of that is the fact that no one knows when its going to
end (just as no one, even in retrospect can really know when it started.}
p. 251
Bubbles are not collective hysteria. If groups on the whole are relatively
intelligent (as we know they are), then theres a good chance that a stock
price is actually right. The problem is that once everyone starts
piggybacking on the wisdom of the group, then no one is doing anything
to add to the wisdom of the group. P. 251
As investors start mirroring each other, the wisdom of the group as a
whole declines. P. 251
Groups are only smart when there is a balance between the information
that everyone in the group shares and the information that each member
holds privately. And the media does play a role in that process. P. 246
Chapter 12: Democracy: Dreams of the Common Good

What is democracy for? Is democracy really about promoting self-interest

not the common good?
In reality a vote has effectively zero chance of changing the outcome of an
election, and for most people, the impact any one politicianeven the
presidentwill have on their everyday lives is relatively small.
Yet people vote because they believe its their duty. P. 264
The question for a representative democracy is Are Americans likely to
pick the candidate who will make the right decision? On those terms, it
seems more than plausible that they are. The fact that people dont know
how much the US spends on foreign aid is no sign of their lack of
intelligence. Its a sign of their lack of information which itself is an
indication of their lack of interest in political details.
One essential ingredient of a healthy democracy is competition which
makes it more likely that politicians will make good decisions by making it
more likely that they will be punished when they dont. p. 266
Would we be better off being ruled by a technocratic elite which in fact we
have with the influence exerted by such people as Donald Rumsfeld or
Colin Power? But one would be hard-pressed to argue that most elites are
able to see past their ideological blinders and uncover the imaginary
public interest. [Just think of the influence Dick Cheney had. NOTE MINE]
The experts dont know the answers. Elites are just as partisan and no
more devoted to the public interest than the average voter. P. 267
Democracy allows for the persistent injection into the system of what
Surowiecki called local knowledge. About the impact of government on
the everyday lives of citizens. P. 267
In the Federalist Papers James Madison feared factions because he felt
they would make it harder for government to seek the public good. That
fear survives today in the familiar critique of the power of interest groups

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and lobbyists [and we had a Supreme Court that allowed PACS to

contribute vast amounts of money to exert influence!!!! NOTE MINE]
In a democracy we have no standard that allows us to judge a political
decision to be right or wrong. There is really no objective sense of
what the common good is. Two politicians may see that entirely
differently. P. 270
Choosing candidates and making policy in a democracy are not, in that
sense, cognition problems and so we should not expect them to yield
themselves to the wisdom of the crowd. On the other hand, theres no
reason to think that any other political system (dictatorship, aristocracy,
rule by elites) will be any better at making policy, and the risks built into
those systemsmost notably the risk of the exercise of unchecked and
unaccountable powerare much greater than those in a democracy. P.
270
Democracy is a way to deal with the most fundamental problems of
cooperation and coordination. How do we live together? How can living
together work to our mutual benefit.
A healthy democracy inculcates the virtues of compromise and change.
The decisions that democracies make may not demonstrate the wisdom of
the crowd. The decision to make them democratically does. P. 271
Afterword
Growing interest in collective wisdom is the product of a host of different
factors but Surowiecki thinks it is directly to the increased importance of
the Internet. The Net is fundamentally respectful of and invests in the
idea of collective wisdom, and in some sense hostile to the idea that
power and authority should belong to a select few. Wikipedia and the Net
and antihierarchical. P. 275-6
We dont always know where good information is. Thats why in general,
its smarter to cast as wide a net as possible, rather than wasting time
figuring out who should be in the group and who should not.
The Wisdom of Crowds is not an argument against experts, but against
our excessive faith in the single individual decision maker. P. 277 For two
reasons: identifying true experts is surprisingly hard to identify and if the
group is smart enough to identify that expert its smart enough not to
need that expert. P. 278
If youre careful to keep a group diverse, and careful to prevent people
from influencing one another too much, the individual mistakes people
make will be irrelevant. And their collective judgment will be wise. P. 279
It is certainly true that you often need a smart individual to recognize the
intelligence of the group. As the value of collective wisdom becomes
more widely recognized, people will be more likely to adopt, on their own,
collective approaches to problem solving and the Internet affords us any
number of examples of wise crowds that are, for the most part, selforganized and self-managed. Were a long way from anything resembling
bottom-up decision making, either in government or in corporate America,
[or in education NOTE MINE], but certainly the potential for it now exists.
P. 281

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What Surowiecki thinks we know now is that in the long run, the crowds
judgment is going to give us the best chance of making the right decision,
and in the face of that knowledge, traditional notions of power and
leadership should begin to pale. P. 282

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