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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, 2004
296 pages, $24.95

Crowds have a poor reputation for being smart, but James Surowiecki, a staff writer for The New Yorker, is determined to change that perception. In The Wisdom of Crowds, he has written a dense but highly readable account of the contexts and conditions under which collective wisdom can exceed that of individual experts. His objective is to change the way we think about and use what he calls well-organized “collectivities.”

Mr. Surowiecki begins by tackling the theory of group decision making, focusing on three kinds of problems: cognitive problems, which have or could have clear solutions (such as “Who is going to win the presidential election?”); coordination problems, or how people can coordinate their behavior; and cooperation problems, meaning how self-interested, often distrustful, people can work together.

In all three situations, the author shows, collective wisdom can be effective when certain conditions are met. First, the group must embody a diversity of opinions, and individuals must be independent — i.e., not overly concerned with what their colleagues are saying. Second, the group must be decentralized so that people can specialize and use local knowledge. Third, there must be a means to aggregate private judgments into a collective decision. When any one of these conditions is not present, the wisdom of collectivities begins to decline rapidly, and, in extreme cases, it can deteriorate into mob behavior.

In the practical second half of the book, the author cites numerous case studies to illustrate effective and ineffective ways of using collective wisdom. Readers who are managers will be interested in the operation of so-called decision markets. These are new information markets where contracts are traded on the outcomes of uncertain events, such as political elections. The Iowa Electronic Market, one of the first of this kind, has generally outperformed major U.S. public opinion polls. (In the 2004 presidential election, its prediction of President Bush’s winning margin of 51.5 percent to Kerry’s 48.5 percent was remarkably close to the actual result.)

Mr. Surowiecki suggests that similar well-constructed markets and communities that are facilitated by the Internet could be used to do everything from forecasting sales of new products to building robust software — think Linux versus Microsoft.

His is a fresh take on this emerging idea of the power of group thinking and decision making. Others have written extensively about many of the ideas Mr. Surowiecki discusses in his book, such as how networks work, the value of group intelligence, and the management of complexity. But when the future and, indeed, the present are as uncertain as they are today, executives need all the help they can get. The Wisdom of Crowds is a valuable and rich resource.