Can a crowd be smarter than an individual? In The Wisdom of Crowds, business columnist James Surowiecki, says “Sometimes, yes.” Starting with a crowd betting on the weight of an ox and ending with the crowd and democracy, Surowiecki looks at “collective intelligence.”
At intrade or Hollywood Stock Exchange (HSX), you can decide whether the collective intelligence of the crowd is correct about probable Oscar winners. Participating in a prediction market, someone purchases a “security” that reflects an opinion about a future event. Reflecting the group’s opinion, more purchases push price upward. Currently, in the intrade and HSX futures markets, The Social Network, with the highest price among the nominees, is the front runner.
At the Iowa Electronic Markets run by the University of Iowa Business School faculty, you can even vote on future fed funds rates.
The Economic Lesson
Surowiecki divides “collective intelligence” into 3 categories: cooperation problems, coordination problems, and cognition problems.
Cooperation problems focus on how people work together. The issues they look at include legislative compromise (or gridlock) and getting a large group together for a dinner.
Coordination problems display how many independent individuals impersonally coordinate their behavior. Examples would take us to rush hour traffic and stock markets.
Cognition problems involve information that makes one answer more accurate than another. Predicting future monetary policy, the future weight of an ox, and who will win the Oscars are cognition problems.