As the new year approaches, I find myself attempting to unweave the many factors that have contributed to the economic crisis we’re in, and I wonder how James Surowiecki is feeling now about the theories he posited in his 2004 book, The Wisdom of Crowds. From the Tulip Craze to the Great Depression, the dot-com bust to the current recession, why do we all seem to so blindly follow the Wisdom of Crowds?
Of course I had my own opinion, but then along came Ashley Ward and her four co-authors with a biological explanation (in Current Biology of course) reminding me that this tendency to behave like lemmings isn’t uniquely human or inspired solely by greed. We have deeply-ingrained instincts that often actually protect and save us from harm. Unfortunately if we’re blindly following these instincts, forgetting to stay alert on decisions that can be devastating if wrong, our choices can backfire dangerously.
The oversimplified summary is that when we aren’t sure of what to do, we often follow the crowd. John Medina talks about the efficiency of this phenomena as well in one of my favorite books, his Brain Rules. After all, if everyone is doing it, it must be the better choice. Right?
This rule persists at an almost instictual level because much of the time it works. In this most recent study, the researchers looked at stickleback fish to see whether they used the wisdom of crowds to choose their leaders, and if so, whether the shortcut actually improved the quality of their decisions.
It did, usually. The larger the school of fish, the better it was at choosing its leader. (See Science News article here – subscription may be required.) Schools could even make subtle distinctions between leaders.
But these schools also had their own versions of undocumented loans, securitized mortgages and Bernie Madoffs.
In the beginning, the fish in the experiments began by choosing one of two leaders. Occassionally a fish would wander off in support of the lesser leader, but typically the vast majority of the school formed behind the stronger choice. As schools grew in size, fish began to simply follow the leader with the most followers.
And there’s the rub. Most of the time following the wisdom of the crowd worked. But when those making the initial choices made errors or overlooked information, most of the fish still followed like, well, lemmings.
In the case of this recent economic crisis, the global financial world followed in much the same way. The market followed instincts evolved for efficient decision making, but many followed the crowd blindly. On decisions crucial to their financial future they ignored warnings that the market was perhaps again irrationally exuberant, and their choice was likely to backfire dangerously.
In the coming year, may you be enriched by the wisdom of crowds. But when you smell something fishy, may you also be blessed with an appropriate dose of skepticism.