Archive for the ‘The Wisdom of Crowds’ Category

Synergy between Wisdom of Crowds and Statistic’s Sample Size

January 19, 2008

The core idea behind the “wisdom of crowds” is that by aggregating information from a large, diverse group of individuals you can obtain a better solution and make better decisions.

Today I was reading Statistics for Dummies by Deborah Rumsey and realized that the motivation for the wisdom of crowds is quite analogous to the motivation for having a large sample size in statistics, as can be seen in these snippets from the book:

Fewer participants in a study means less information overall, so studies with small numbers of participants in general are less accurate than similar studies with larger sample sizes … Most researchers try to include the largest sample size they can afford, and they balance the cost of the sample size with the need for accuracy … Check the sample size to be sure you have enough information on which to base your results.

Your company needs to long-range forecast? Don’t depend on a single person!

January 18, 2008

Companies try to forecast the future. For example, a printer company tries to forecast the future demand of printers. Based on their forecasts, they make planning decisions. Thus, decisions are made in the face of uncertainty.

The more power you give to a single individual in the face of complexity and uncertainty, the more likely it is that bad decisions will get made.

Conversely, decisions made by aggregating the collective wisdom of a diverse group of people will outperform even the smartest person most of the time.

— Paraphrasing The Wisdom of Crowds by James Suroweicki

Two reasons for a person’s success or failure

January 7, 2008

There are a couple of reasons for a person’s success or lack of success:

  • Luck: success is not necessarily an indicator of skill or foresight, but may be the result of fortuitous circumstances. That is, success may be the result of luck.
  • The right skills for the situation: intelligence is not fungible — it is not equally effective in every context. The skills and knowledge that a person has may be perfectly suited to a certain situation at a certain time, but change the situation slightly or shift the time and the skill set may no longer be suitable. (Lesson learned: continually update your knowledge and skills.)

— Extracted from The Wisdom of Crowds by James Suroweicki

[Definition] Fungible: When two or more things are inter-changeable, can be substituted for each other, or are of equal value, they are described as fungible.  (Source:

CEO: From Genius to Fool?

January 3, 2008

The business landscape of the last decade is littered with CEOs who went from being acclaimed as geniuses to being dismissed as fools because of strategic mistakes.

Were these executives fools?

Did they go from being brilliant to being stupid overnight?

No and no.  They were as smart and skilled at the end as they were at the beginning.  It’s just that they were never skilled enough to consistently predict the future, probably because no one is.

CEOs should come with the same disclaimer as mutual funds: Past success is no guarantee of future success.

— Extracted from The Wisdom of Crowds by James Suroweicki

Paradox: Embracing Decentralization while Hailing the CEO as Corporate Savior

December 31, 2007

Some companies claim to embrace decentralization and bottom-up mechanisms and yet they then turn around and treat their CEO as superheroes and as the “corporate savior.”

CEOs are given massive salaries and are hyped as the one person who will lead the company to prosperity.

The problem is that people actually believe the hype, taking it on faith that putting the right individual at the top is the key to corporate success.

What’s perplexing about this faith is how little evidence there is that a single individual can consistently make superior forecasts or strategic decisions in the face of a genuine uncertainty.

If companies were to truly embrace the virtues of decentralization then the CEO would have a much smaller role (and paid much less) and there would be more emphasis on collective decision-making.

— Extracted from The Wisdom of Crowds by James Suroweicki

Judge an idea by its merit, not by the status of the person making it

December 29, 2007

Alfred Sloan of General Electric refused to allow the merit of an idea be determined by the status of the person making it.

The Wisdom of Crowds by James Suroweicki

Aligning worker and corporate interests

December 24, 2007

Here are two approaches to solve the problem of aligning worker interests with the corporate interests:

  1. Home owners are, in general, more likely to take good care of their property than renters are. Similarly, workers who have an ownership in a company are more likely to be interested and productive than if they simply “work there.” Give workers stock options.
  2. When someone else makes all the decisions (about how to solve a problem, which alternative to take, etc.) then workers have no incentive to be creative and are not motivated. Give workers real decision-making power.

— Extracted from The Wisdom of Crowds by James Suroweicki

Corporations versus the Marketplace

December 22, 2007

It’s useful to compare the way things work within companies versus how things work in the marketplace.

  1. How people are paid:
    • Company: people are paid based on whether they do what they’re expected to do. In a company how much money you make depends on someone’s expectations of you.
    • Marketplace: people get paid based simply on what they do. In the market you don’t get paid any more money if you exceed your (or someone’s) expectations. Example: your local deli owner doesn’t make any more money if his sales at the year end beat his expectations.
  2. What happens to information:
    • Company: people have an incentive to hide information. Example: people don’t want to upset their bosses, so they don’t reveal problems; further, they avoid disagreeing with their boss.
    • Marketplace: businesses have an incentive to uncover valuable information and act on it. Example: a shoe store owner wants to know what kinds of sneaker kids will be buying this summer.

Ideally, inside a company employees would be paid based on what they do, not on someone’s expectations.

Companies should be looking for ways to provide their employees with the incentive to uncover and act on private information.

The Wisdom of Crowds by James Suroweicki

Companies are paying people to lie

December 19, 2007

Companies are paying people to lie.

Companies offer bonuses to executives and workers when they surpass a given target. Companies do this to push executives and workers to meet goals that seem unattainable. But the real effect of these kinds of targets is to encourage people to be deceptive, i.e. to lie. Below are a couple examples to illustrate this.

Goldbricking in a Machine Shop

Lathe operators in a certain machine shop are paid according to what’s called a “piece-rate incentive system.” They start out with a rate per piece. Once they hit a certain target, their rate per piece increases. Once they get over a second hurtle the rate per piece increases again.

The problem the workers faced was that if they worked too hard or too fast, the hurtle would be raised. So, the workers restricted their output and worked more slowly than they might have.

Instead of trying to be as productive as possible, they spent their time figuring out how to manipulate the rate per piece so they could make as much money as possible.

Management Lowballing

The phenomena we just saw with the lathe operators is also at work with managers.

Tell a manager that he will get a bonus when budget and performance targets are met and two things are sure to happen:

  1. Managers will set targets that are easily reachable by lowballing their estimates for the year ahead and poor-mouthing their prospects.
  2. Once targets are set they will do everything they can to meet them.


The company does not know the real productivity of the lathe operators.

The company does not know what the real performance is of its managers.

Companies need good information to plan for the future, but they are not getting it because they are paying their employees to lie.

— Extracted from The Wisdom of Crowds by James Suroweicki

Unless people know what the truth is, it’s unlikely they’ll make the right decision

December 7, 2007

“Unless people know what the truth is, it’s unlikely they’ll make the right decision.” [Wisdom of Crowds by James Suroweicki]

If employees see problems and keep it to themselves, it leaves an organization without knowing the truth, and thus unlikely to make the right decisions and stunts organizational learning. For example:

“Those nurses whom doctors and administrators saw as most talented unwittingly caused the same mistakes to happen over and over. These “ideal” nurses quietly adjust to inadequate materials without complaint, silently correct others’ mistakes without confronting error-makers, create the impression that they never fail, and find ways to quietly do the job without questioning flawed practices. These nurses get sterling evaluations, but their silence and ability to disguise and work around problems undermine organizational learning. Rather than these smart silent types, hospitals would serve patients better if they brought in noisy types instead.”

Hard Facts by Jeffrey Pfeffer and Robert I. Sutton