The Wisdom of Crowds

I happened to read this marvellous book, the theme of which I have also started to realise over the past few years ... But putting it in this form would have required a lot of effort and research. Pretty interesting a read, the theme is centered around the idea that more often than not, it is the masses collectively that take the wisest or the most optimal decision. Not that they are always right, but unbiased decisions taken by the crowd is the best quality decisions that can be made.

According to the author, a crowd would act in Cognition, Coordination or Cooperation. There are essential ingredients that a crowd must posses (Diversity, Independence, Decentralization, and Aggregration) and the pitfalls that must be guarded against so that intelligent decisions can be taken . And amazingly, they correlate closely with what one would expect to see in a good B-school crowd. Having been in one once, I can bear testimony to the validity of these factors in practice. More about that on the wikipedia entry here.

There are a lot of interesting experiments cited by the author the context of which ranges from village fairs to NASA labs. These and a whole lot to do with "experimental economics". This comes with quite a bit of capital markets thrown in with their share of (in)famous incidents. This doesn't really mean that one has to be well-versed with the markets. But yeah, one would definitely transcend the meaning of "beating the street" once he/she reads this. The incidents are pretty recent, given that the book itself is not too old (2004). In one particular experiment at Caltech, it is mentioned how educated people would knowingly inflate the price of a security only by assuming that there was a bigger idiot around.

Over the past few years, I have myself become an advocate of free-markets, and my purpose really feeds on in good measure by the book. Except for the last part, where the author almost thrusts a case for democracy on you (I am pro-democracy), the book is a good fast read as you jump on from experiment to experiment.