As is nearly always the case, my to-read list is progressing slower than I would hope. But at least it’s getting somewhere, this time with James Surowiecki’s The Wisdom of Crowds: Why the Many Are Smarter Than the Few being the topic of today. My very first feeling when I started reading it was along the lines of “yeah, right, wisdom of crowds my…” as I had the tendency to think of the kind of crowds that act in exceedingly stupid ways. So while acknowledging the awesome achievements of the likes of Wikipedia, it’s safe say that I was skeptical of the overall concept.
I’ll admit outright that Wisdom of Crowds did increase my appreciation of several things, not least of which is the value a crowd can have. However, it also turns out that merely having a crowd is far from guaranteeing good results. Surowiecki clearly lays out the prerequisites for successful decision making in groups: diversity, independence and decentralization. These three aspects are really the core of the book, but even without getting into any detail of those here, it’s clear that they matter a great deal – just think how susceptible a uniform, interdependent group is to groupthink.
There are some very sobering lessons in the book. For one, often when it comes to decision making, experts are useless in the long run. In fact, they’re often worse than useless, they provide misleading advice. Ever wonder why most funds underperform the market in the long term? Because they’re being managed by an “expert” or at most by an interconnected group of experts. And yet we rely on the advice of experts on many walks of life – and especially when it comes to the financial experts, pay them ridiculously much for their assumed expertise that, it turns out, often doesn’t stand any closer scrutiny when you look at the performance over time.
Does this mean any group of random people can, say, diagnose any illness as well or better than your doctor? Of course not. But it does mean you should not assume that one expert can consistently perform better than average in many kinds of decision-making tasks.
Other fascinating topics covered in the book included defending the recently much-disparaged short-selling activity as a crucial part of a working market, advocating decision markets as a way of making intelligent decisions and emphasizing the importance of having a devil’s advocate in a group. Markets in general are discussed quite a bit, and one deceptively simple but powerful point there is to realize that the measure of a working stock market is NOT rising prices.
The book is not perfect, far from it – for one, there’s a huge blunder of claiming Linus Torvalds as being Norwegian! Oh the humanity! 
Other than that, the book also ended more with a whimper than a bang, with the last chapter IMO attempting to take a bit too big of a bite by trying to quickly cover some fundamental things about democracy.
Perfect or not, this is a must-read book, especially if you continue to believe in the hero-myth that a single individual – say an expert, a CEO or your fund manager etc – can continually make better-than-average decisions, singlehandedly save a company from ruin or consistently outperform the market. Plus the advice will certainly help you build better-performing teams and understand why some group efforts work very well while others fail miserably.
