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Deloitte Analytics
Symposium 2010
Thoughts on “The
Wisdom of Crowds”
Bill Thomas
October 2010

Agenda

•“The Wisdom of Crowds" by James
Surowiecki
•Decision making challenges
•Diversity of opinion
•Independence
•Decentralization and aggregation
•Successful crowd-based activities

1 Thoughts on “The Wisdom of Crowds” Copyright © 2010 Deloitte Development LLC. All rights reserved.

The Wisdom of Crowds

Why the many are smarter than the few and how
collective wisdom shape business, economies,
societies, and nations

James Surowiecki


Wisdom of Crowds

• The findings, accounts, and statistics presented throughout this
presentation are based on material reported in the book “Wisdom
of Crowds” published by Doubleday and copyright 2004 by
James Surowiecki.
• Additional references include excerpt From: Michael J.
Mauboussin “Think Twice: Harnessing the power of Counter
Intuition.”
• Deloitte does not endorse nor has validated the findings
presented.

As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about
for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.


Decision making challenges

• We generally have less information than we would like.

• We have limited foresight.

• We often assume that the key to solving a problem or making
good decisions is dependent on finding the one right person who
has the answer.

Surprisingly, when our “imperfect” judgments are aggregated in
the right way, our collective intelligence is often excellent and is
more accurate than any “expert.”


Sir Francis Galton

• Born February 16, 1822, died January 17, 1911
• Half-cousin of Charles Darwin
• English Victorian polymath, anthropologist,
eugenicist, tropical explorer, geographer,
inventor, meteorologist, proto-geneticist,
psychometrician, and statistician
• He was knighted in 1909
• Galton had a prolific intellect and produced over
340 papers and books throughout his lifetime.
He also created the statistical concept of
correlation and widely promoted regression
toward the mean


Sir Francis Galton (cont.)

Galton is credited with having identified the first
known example of the wisdom of a crowd:
• 1906 “West of England Fat Stock and Poultry
Exhibition”
• Contest to guess the weight of the ox on display
after it had been “slaughtered and dressed”
• 800 people entered the contest, yet nobody
guessed the correct weight
• Afterward, Galton calculated the average of all the entries
• Galton’s average estimate: 1,197 pounds
• Actual weight of ox: 1,198 pounds
Under the right circumstances, groups are remarkably intelligent
and are often smarter than the smartest among them.


Real world examples

• The TV studio audience on “Who Wants To Be A Millionaire?”
picks the right answer 91% of the time.

• While this is a fun fact, it really only highlights that a crowd may
know more facts than a single individual.

• What about predicting the unknown based on little or no
information?


How do you find a lost submarine?

In May 1968, the U.S. submarine Scorpion
disappeared.

• The Navy knew nothing about what happened
to the sub or where it was, they only knew:
– the Scorpion’s last reported location.
– the Scorpion’s destination should have been Newport
News Virginia.

• The Navy started a 20-mile wide search in
water thousands of feet deep, a process that
would eventually take many months to
complete.


How do you find a lost submarine? (cont.)

• Naval officer John Craven took a different
approach.

• Craven brought together a large group of
people with diverse backgrounds, such as
mathematicians, salvage experts, and
submarine specialist.

• Although none of their individual guesses were
correct, their combined guesses were within
220 yards of the Scorprion’s final resting
space.


Experiment

I have just sent you an message to meet me in NYC tomorrow

– Where would you go to meet me?
• Text one of the following to 22333
– EMPIRE
– LIBERTY
– STATION
– GARDEN

– What time would you get there?
• Text TIME {YOUR GUESS}” TO 22333


Experiment results

• In 1958, social scientist
Thomas C. Schelling ran the
same experiment

• The majority of his students
replied “The information booth
at Grand Central Station”

• Almost all of his students
replied 12 noon


Real world examples

January 28, 1986 – The Challenger Disaster

• By end of the trading day, the stock of all four
major companies involved in building the
shuttle fleet were down.
– Rockwell down 3%
– Lockheed down 3%
– Martin Marietta down 3%
– Morton Thiokol down 12%

• Six months later, the President’s commission
determined Morton Thiokol O-Rings were at
fault in the disaster.


Real world examples (cont.)

The Iowa Electronics Markets (IEM) allows people to buy and sell
futures “contracts” based on how well they think a given candidate
will do in an upcoming election.
• 1988–2000, 1.37% off on presidential elections
• 3.43% off on other U.S. elections
• 2.12% off on foreign elections
• 75% of IEM contracts were more accurate than the 596 opinion
polls they were compared against


Real world examples (cont.)

• Hollywood Stock Exchange (HSX) is an
entertainment site where participants buy
and sell movies and actors as if they
were stocks

• 2000, HSX predicted 6 out of 6 for “Best”

• 2002, HSX predicted 35 out of 40
nominees


Real world examples

• The Stock Market, IEM, HSX are all examples of Decision
Markets.

• The sample markets mentioned here are successful because
they satisfy the four conditions needed to tap into the “Wisdom Of
Crowds.”


Right conditions for making good group decisions

Given the right conditions and the right problems, a decision
market’s fundamental characteristics are guaranteed to make for
good group decisions. These characteristics include:
1. Diversity of opinion
2. Independence
3. Decentralization
4. Aggregation

• Unfortunately, satisfying the conditions of diversity,
independence, and decentralization and aggregation are
challenging.


Diversity of opinion

• Diversity insures meaningful differences between ideas to increase the
likelihood one good idea will survive and adds perspective, which
eliminates obviously bad ideas.

• Markets are inherently diverse, corporations are not.

• Adding a few people who know less but have
different skills can actually improve a group's
performance.

“Homogeneous groups are great at doing what they do well, but
they become progressively less able to investigate alternatives.”


Diversity of opinion (cont.)

The experts are often wrong:

• Between 1984 and 1999, 90% of Mutual Fund Managers
underperformed the Wilshire 5000

• Wharton professor J. Scott Armstrong said
– “I could find no studies that showed an important advantage for expertise”
– “expertise and accuracy are unrelated”

• Notable exceptions: Warren Buffet 


Independence

• Independence allows people to say what they really think.

• Independence prevents mistakes by individuals from becoming
correlated and spread throughout the group.

• Independence is the hardest to maintain in a corporation
because people are inherently social beings.

“You can be biased and irrational, but as long as you are
independent, you won’t make the group any dumber.”


You are an national sporting league coach, it is 4th
down and you are on your opponents 34 yard line


Experiment

• Conventional wisdom among NFL coaches is you go for the
points, Berkeley economist David Romer says you should go for
the first down!

• According to Romer, going for the points has become a truism
that has corrupted the independence of the group.

• Based on analyzing three years of NFL games, Romer has
concluded that NFL coaches, as a group, are way too
conservative.

The only coach that seems to have taken Romer seriously is Bill
Belichick, whose penchant for rejecting the conventional wisdom
has helped the Patriots win multiple Super Bowls.


Decentralization and aggregation

• Decentralization fosters and is fed by specialization and
increases the scope and diversity of the opinions and information
in the “system.”
– Linux and the Internet are examples of highly successful decentralized
solutions.
• A decentralized system can only produce genuinely intelligent
results if there is a means for aggregating the information of
everyone in the “system.”
– Pre-9/11, U.S. intelligence agencies are an example of a failed decentralized
system because it lacked the aggregation needed to bring information to
everyone in the system.

For analytic solutions to be successful within corporations, they
need to provide intelligent aggregation of the decentralized
solutions found throughout the organization.


Successful crowd-based activities

Who discovered the SARS Virus? Answer: Everyone!

• The World Health Organization provided coordination or
“aggregation.”

• Eleven labs from France, Germany, the Netherlands, Japan, the
United States, Hong Kong, Singapore, Canada, the United
Kingdom, and China all participated.

• The coronavirus was identified in just a few short weeks, a task
which could have taken months if an individual lab was working
on the problem.


Successful crowd-based activities (cont.)

• In 1994, 450 different physicists were credited with the discovery
of the quantum particle also known as the “Top Quark.”

• SARS and the “Top Quark” projects are examples of very
successful collaboration.

• Collaborative activities work because it makes each participant
more productive.

“Today’s complex problem solving requires multiple perspectives.
The days of Leonardo da Vinci are over.”


I have been given $10 with instructions that I can
split the money between us anyway I would like but
the only way we both can keep the money is if we
both agree with the split.


Experiment

• A rational person would say I am getting $1 more than I had, but
more often than not the offer is rejected because it feels
inherently wrong.
– This is the basis for the show “Deal Or No-Deal.”
– Would you change your answer if you got $100,000 and I got $900,000?

• Key to fostering participation in crowd activities are the following
requirements:
1. All participants must believe they are being treated fairly.
2. Participants must see value in contributing typically through increased
productivity.
3. Information must be shared openly among all participants.


Real World Example: Best Buy

Excerpt from: Michael J. Mauboussin “Think Twice: Harnessing the
power of Counterintuition”
… So you can imagine the reaction when James Surowiecki, author of the best-selling
book, The Wisdom of Crowds, strolled into Best Buy’s headquarters and delivered a startling
message: a relatively uninformed crowd could predict better than the organization’s best
seers.

Surowiecki’s message resonated with Jeff Severt’s, an executive then running Best Buy’s
gift card business. Severts wondered whether the idea would really work in a corporate
setting, so he gave a few hundred people in the organization some basic background
information and asked them to forecast February 2005 gift card sales. When he tallied the
results in March, the average of the nearly 200 respondents was 99.5% accurate. His team’s
official forecast was off by five percentage points. The crowd was better, but was it a fluke?


Real World Example: Best Buy (cont.)

Excerpt from: Michael J. Mauboussin “Think Twice: Harnessing the
power of Counterintuition”
“Later that year, Severts set up a central location for employees to submit and update their
estimates of sales from Thanksgiving through year-end. More than 300 employees
participated and Severts kept track of the crowd’s collective guess. When the dust settled in
early 2006, he revealed that the official forecast of the internal experts was 93% accurate,
while the presumed amateur crowd was off by only one-tenth of 1%.

Best Buy subsequently allocated additional resources to its prediction market, called
TagTrade. The market has yielded useful insights for managers through the more than 2,000
employees who have made tens of thousands of trades on topics ranging from customer
satisfaction scores to store openings to movie sales. For instance, in early 2008, TagTrade
indicated that sales of a new service package for laptops would be disappointing when
compared with the formal forecast. When early results confirmed the prediction, the
company pulled the offering and relaunched it in the fall. While far from flawless, the
prediction market has been more accurate than the experts a majority of the time and has
provided management with information it would not have had otherwise.”


Summary: Thoughts on “The Wisdom of Crowds”

• We often have less information than
we would like when making decisions.

• Crowd-based markets and
collaborative efforts can yield
breakthrough solutions to complex
problems.

• Crowd-based activities require creating
the right environment that includes
diversity of opinion, independence,
decentralization and aggregation,
fairness for all participants, and open
access to information.

Tap into the wisdom of
the crowd!

Contacts

Bill Thomas
Principal
Deloitte Consulting LLP
williamkthomas@deloitte.com


"This presentation contains general information only and is based on the experiences and research of Deloitte practitioners. Deloitte is
not, by means of this presentation, rendering business, financial, investment, or other professional advice or services. This
presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that
may affect your business. Before making any decision or taking any action that may affect your business, you should consult a
qualified professional advisor. Deloitte, its affiliates, and related entities shall not be responsible for any loss sustained by any person
who relies on this presentation.

About Deloitte
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of
member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed
description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Please see www.deloitte.com/us/about
for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.

Copyright © 2010 Deloitte Development LLC. All rights reserved.
Member of Deloitte Touche Tohmatsu Limited

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