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Written by Wei-Jing Zhu
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A second great book underlying the concept of this site.
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
Four elements of a wise crowd:
- Diversity of opinion: Each person should have private information even if it's just an eccentric interpretation of the known facts.
- Independence: People's opinions aren't determined by the opinions of those around them.
Decentralization: People are able to specialize and draw on local knowledge. - Aggregation: Some mechanism exists for turning private judgments into a collective decision.
Prediction markets:
- IEM.com (Iowa election market)
- HSX
- MIT innovation market
My running notes:
See the detailed version here.
In the Info + Noise formulation, each person must have IID (
independent distribution) of information, so that when enough samples
are added, the noise cancel out.
Note that there must be some information in the Info part of the equation. Counter example: children playing the market.
Even new recruits add new dimension of information, though they know
less than the average. The stale expert groups in contrast no
longer grows, but are too busy exploiting.
Bee-hive strategy to model business products:
- prototype with diverse explorers
- vote by the market (most people dont realize the difference
between typical Web2.0 where each person casts 1 direct vote, vs
Google's EM that turns the link votes into something spectacular.)
Need for experts?
- How about letting CEO role be played by crowds (or employees)?
- e.g. Index Fund is far more sophisticated than the simple algorithm suggests, and thus the market is hard to beat!
- How to tell luck vs expert? Think of the statistical
illusion that it is only 1/128 chance to win 8 consecutive streak of
flipping a coin, and the myriad of investment charlatans that make use
of this old trick.
Independent decision
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peer pressure, conformity
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looking skyward, social proof,
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immitation, cascade (fad, as in fashion and style)
Group think - concensus, or even the appearance of concensus, makes diverse opinions improbable.
Psych expt shows that the pressure to conform makes people play along
against their own heart. Yet one allie is enough to reduce the
level of complacency.
Ants march of death shows that noise and errors must not correlate. Yet private bias and errors are OK.
Social Proof, which is not conformity, still cause correlated
errors. If too many people go along with some opinion, the group
wisdom stops being meaningful.
Private vs public information - conservative farmers
Against conventional thinking:
Statistical model on Football strategy of whether to go for the 4th down:
Dynamic programming shows better to be aggressive.
Emotional strategy:
no one loses his job buying IBM. appearance of rational. socially acceptable risk.
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