The wisdom of crowds: Bubbles and Smokescreens

I’ve been having a debate tonight with Tom Foremski about an article he wrote about “The wisdom of crowds and financial bubbles” on twitter

I’m writing this to explain what I feel is obvious about the notion of the wisdom of crowds.

The wisdom of crowds essentially states that given certain conditions a crowd on average will predict an outcome of a give circumstance better than an expert individual in that crowd. It seems to me that it’s blatantly obvious that individuals in the crowd and the nature of the question being asked will affect the accuracy of the prediction.

Tom asks the question

I wonder if the recent financial speculative bubbles will do much to erode the accepted notion of the “wisdom of crowds?”

I can’t help but think that Tom is laying the blame here at the wrong door.

The most basic problem I have with this is that the current financial problems have absolutely nothing to do with the ‘wisdom of the crowd’ paradigm as it is used by web 2.0 companies at all. In fact it is more due to the far more prevalent problem of herd mentality. Which is to say that a lot of behaviours in all marketplaces are to do with people following leaders (experts) due to a false belief that their expertise has weight. This creates an ‘everyones doing it because everyones doing it effect’ which is the antithesis of the ‘wisdom of crowds’ principal.

The wisdom of crowds has to do with measuring the independent responses of the individuals in a crowd and then averaging them. The vital part of that is that those answers are independent. If they are not then the crowd will inevitably be led by social norms to follow “experts”.

In summary it is the human urge to follow the will of charismatic experts and leaders in certain fields which leads to all of the examples Tom uses such as, pogroms, Hitler and financial problems. Indeed the Madness of crowds is more often than not tainted by the madness of the people who organised the crowd.