what is wisdom of crowds 
wisdom of crowds is the idea that large groups of people are collectively smarter than individual experts when it comes to problem solving decision making innovating and predicting the idea is that the viewpoint of an individual can inherently be biased whereas taking the average knowledge of a crowd can result in eliminating the bias or noise to produce a clearer and more coherent result the theory is often applied to financial markets to show why markets in some instances operate efficiently and other times inefficiently market participants in the crowd need to be diverse and have an incentive for markets to function efficiently understanding wisdom of crowdsthe wisdom of crowds concept was popularized by james surowiecki in his 2004 book the wisdom of crowds which examines how large groups have made superior decisions in pop culture psychology biology behavioral economics and other fields the idea of wisdom of crowds can be traced back to aristotle s theory of collective judgment as presented in his work politics he used a potluck dinner as an example explaining that a group of individuals may come together to create a more satisfying feast for the group as a whole than what one individual might provide 1crowds aren t always wise in fact some can be the opposite take for instance frenzied investors who participate in a stock market bubble like the one that occurred in the 1990s with dotcom companies the group or crowd involved in this bubble invested based on speculation that internet startups would become profitable at some point in the future many of these companies stock prices soared despite the fact that they had yet to generate any revenue unfortunately a good portion of the companies went under as panic ensued in the markets following mass sell orders on the stocks of some of the major tech companies characteristics of a wise crowdaccording to surowiecki wise crowds have several key characteristics a 2018 study updated the wisdom of crowds theory by suggesting that crowds within an existing group are wiser than the group itself the researchers called their results an improvement over the existing wisdom of crowds theory 3they recorded responses to their questions privately from individuals and collectively by having small groups that were subdivisions of larger ones discuss the same question before providing an answer the researchers found that responses from the small groups in which the question was discussed before an answer was agreed upon were more accurate than individual responses 3wisdom of crowds in financial marketsthe wisdom of crowds can also help explain what makes markets which are a type of crowd efficient at times and inefficient at others if market participants are not diverse and if they lack incentives then markets will be inefficient and an item s price will be out of step with its value in a 2015 bloomberg article wealth manager and columnist barry ritholtz argued that prediction markets for example futures markets unlike markets for goods and services lack the wisdom of crowds because they do not have a large or diverse pool of participants 4he points out that prediction markets failed spectacularly in trying to guess the outcomes of events such as the greek referendum the michael jackson trial and the 2004 iowa primary the individuals trying to predict the outcomes of these events were simply guessing based on public polling data and did not have any special individual or collective knowledge 4while there is merit to the idea that the many are smarter than the few it is not always true particularly when members of the crowd are aware of and are influenced by one another s ideas consensus thinking among a group of people with poor judgment can unsurprisingly lead to poor group decision making this factor may have been one of the causes of the 2008 financial crisis it can also explain why democracies sometimes elect unqualified leaders in other words as explained by british science writer philip ball in a 2014 article for the bbc it matters who is in the crowd 5advantages and disadvantages of wisdom of crowdswisdom of crowds allows for diversity and a broad range of thinking this provides more color and experience in problem solving than that of an individual which may often be biased it also allows for the integration of information whereby the vast knowledge of separate individuals creates a larger knowledge pool one of the main criticisms of the wisdom of crowds is that humans tend to conform leading to groupthink which defeats the purpose of the diversity needed in wisdom of crowds in addition if many individuals are aiming to reach a decision and consensus it can lead to disagreements and in fighting diversityinformation integrationlarge knowledge poolconformitydisagreements and in fightingexamples of wisdom of crowdstwo examples that show how the concept works 