The Wisdom of Crowds

I just bought James Surowiecki's The Wisdom of Crowds, which articulates nicely a fundamental belief of many economists (it explains why I don't believe in managed mutual funds, for instance). I've always been a fan of Surowiecki's columns in the New Yorker, and the book's great. Even in my brief reads on the subway there've been a few bits that struck me... the idea that the best ideas do not require everyone to buy into them, but simply require that there is a means to aggegate judgements:

An intelligent group... does not ask its members to modify their positions in order to let the group reach a decision everyone can be happy with. Instead, it figures out how to use mechanisms - like market prices, or intelligent voting systems - to aggregate and produce collective judgements...

Here's Surowiecki's speech at the O'Reilly Emerging Technologies conference, where he makes the same point:

The wisdom of crowds works well when there is a true answer, and as long as some choices are better than others. The key is that people are mostly working on their private information, which may not be good, may be fragmented, but it is diverse. Collective wisdom does not emerge out of consensus. The goal is not to get everyone to agree – it’s to tap into people who disagree, into the diverse information everybody has. It works best when people are not paying too much attention to what everyone else is doing. They have some sense – like feedback in the form of odds at the racetrack – but there isn’t a lot of personal interaction.

Excerpt from Surowiecki.