Emergic: Rajesh Jain's Blog

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Groups are Smarter

June 7th, 2004 · No Comments

Tim Bray points to an article in Wired by James Surowiecki:

Instead of looking to a single person for the right answers, companies need to recognize a simple truth: Under the right conditions, groups are smarter than the smartest person within them. We often think of groups and crowds as stupid, feckless, and dominated by the lowest common denominator. But take a look around. The crowd at a racing track does an uncannily good job of forecasting the outcome, better in fact than just about any single bettor can do. Horses that go off at 3-to-1 odds win a quarter of the time, horses that go off at 6-to-1 win a seventh of the time, and so on. Decision markets, like the Iowa Electronics Markets (which forecasts elections) and the Hollywood Stock Exchange (which predicts box office results), consistently outperform industry forecasts. Even the stock market, though it’s subject to fads and manias, is near-impossible to beat over time.

By contrast, while it’s clear that some CEOs are excellent leaders and managers, there’s little evidence that individual executives are blessed with consistently good strategic foresight. In fact, in an extensive study of intelligent CEOs who made disastrous decisions, Dartmouth’s Sydney Finkelstein writes, “CEOs should come with the same disclaimer as mutual funds: Past success is no guarantee of future success.” Even when executives are smart, they have a hard time getting the information they need – at so many firms the flow of information is shaped by political infighting, sycophancy, and a confusion of status with knowledge. Hierarchies have certain virtues – efficiency and speed – as a way of executing decisions. But they’re outmoded as a way of making decisions, and they’re ill-suited to the complex strategic landscapes that most companies now inhabit. Firms need to aggregate the collective wisdom instead.

One intriguing method of doing this is to set up internal decision markets, which firms can use to produce forecasts of the future and evaluations of potential corporate strategies.

Tags: Management

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