The premise of the book
In the book The wisdom of crowds published i 2004, the author James Surowiecki argues that crowds often aggregates information and make better decisions than could have been made by any single member of the group. Surowiecki makes several compelling arguments by presenting anecdotes of crowds superiority in decision making.
The opening story of the book presents his thesis pretty well. Is about the statistician Francis Galton who attended a stock and poultry show where he observed a competition where a crowd was asked to guess the weight of an ox. He recorded the guesses made by almost 800 people at the show and averaged the guesses. Galton found that the average of the guesses was just one pound less than what the ox actually weighed. Surowiecki calls this phenomenon of collective intelligence the wisdom of crowds.
The conditions that make up a wise crowd.
According to Surowiecki there are four essential conditions that makes up a wise crowd:
1. Diversity – each person must have som private information that she/he brings to the group.
2. Independence – each person stick to their own reasoning, tries not to be influenced by opinions in the group.
3. Decentralization – no person dictates the crowd, the members of the group can specialize and draw on local knowledge.
4. Aggregation- there must be in place a method for turning private judgments into a collective decision. Surowiecki proposes that a stock-market model could be used as an aggregator to better predict outcomes of future events and/or to share information within and among members of an organization.
The belief in a collective wisdom is not at all new. The idea of democracy is built upon this and Aristotle wrote about the wisdom of crowd in his work Politics. My takeaways from the book is the examples of how crowds of people together can make accurate estimates and intelligent decisions in special areas in which they as individuals have no competence. And they beat the experts.
How the book relates to crowdfunding.
So how do this book and the wisdom of crowds thesis relate to crowdfund investing? In crowdfund investing the conditions of a wise crowd can be achieved. The investors is a crowd of mostly non experts and by them self they are trying to figure out which campaigns to invest in. The all get to act as anonymous individuals with their own interest in mind, without outside pressure as groupthink and conformity. The financial experts are out of the way and the information is aggregated anonymously throug a platform. This might actually make crowdfunding campaigns a ideal arena to assess the wisdom of crowds thesis. A successful over funded crowdfunding campaign in the light of this may be a forecast of a great future for the company running the campaign, as this is what the crowd predicts.
As crowdfund investing is relatively new we do not yet know the correlation of successful over funded campaigns and future success for the companies, but someday we will. In the meantime I will trust the wisdom of the crowd and pay attention to the most popular campaigns.