(This article previously appeared in Chief Executive Magazine)
If making critical business decisions is what you do for a living, there is one book that I can highly recommend: James Surowiecki’s The Wisdom of Crowds.
Surowiecki is interested in how groups make great decisions, and the corollary, how they end up with disasters, whether it happens to be in an election or about a racial stereotype. In many cases when decisions are disastrous, the group doesn’t represent the feelings of the individuals who form the group.
How can that be?
When the small bits don’t add up to the whole, and you see this clearly in cases like Enron and Lehman Brothers, it means collectivism was neither wise nor prudent. Even when you examine the backgrounds of the individuals involved, many were stellar thinkers with exceptional resumes, the conclusion is that they failed as a group to be the individuals they were.
To understand where they went wrong, start with the word “they.” That’s where The Wisdom of Crowds begins, in 1906, when British scientist Francis Galton was watching the ‘they’ at the annual West of England Fat Stock and Poultry Exhibition, “a regional fair where the local farmers and townspeople gathered to appraise the quality of each other’s cattle, sheep, chickens, horses, and pigs.” Galton was a highly respected 85-year-old researcher in the field of statistics and heredity.
As Galton strolled the fairgrounds, he noticed a crowd placing bets on the weight of an ox standing by a scale. A hallmark of crowd wisdom is that the group has skin in the game, as investing in the stock market does. Every entrant wrote his or her best guess of the ox’s weight and handed it in like you might an election card at a voting booth. In fact, Galton wrote, “the average competitor was probably as well fitted for making a just estimate of the dressed weight of the ox as an average voter is of judging the merits of most political issues.”
Over 800 people guessed at the ox’s weight. Some had context because they worked with livestock, whereas others were non-agrarians two generations into the industrial revolution and knew nothing about what an ox weighed. Galton compiled the 787 guesses (13 were illegible) and graphed them “from highest to lowest to see if they would form a bell curve.” The average of the estimates formed what Surowiecki calls “the collective wisdom of the Plymouth crowd.” Galton presumed the average would be wrong by a landslide.
When he looked at his graph, it showed “the crowd had guessed that the ox would weigh 1,197 pounds,” whereas the ox’s actual weight was 1,198 pounds. The crowd’s guess was one pound off.
Galton’s lesson to business leaders running the smallest of startups to Jeff Bezos’ is that “under the right circumstances, groups are remarkably intelligent, and are often smarter than the smartest people in them. Even if most of the people within a group are not especially well-informed or rational, it can still reach a collectively wise decision.”
When groups make poor decisions, as in cases like Enron and Lehman Brothers, it usually suggests that elements of good group thinking are missing. Surowiecki says that for groups to make the right decisions, we must have “diversity and independence” because the right decision comes from vigorous debate and challenges, not a desire for harmony or agreement.
Groups that make sure individuals think like individuals and not like the group are always the smartest.