The Psychic Power of Crowds

Years ago, I skimmed The Wisdom of Crowds by James Surowiecki. Over the last two years, I've also read a lot about the aggregation of information in society and spontaneous orders. I got another interesting example of this seemingly magical phenomenon in one of my grad school classes last week: the Delphic Method. Cool example from class:

Thirteen people were asked to write their weight on a sheet of paper along with their best guess at the class's average weight. The actual average weight was 158.15. The estimated average weight = 157.23. The amazing thing is that the law of large numbers tends to balance out individual errors even in a small group. So the aggregated estimate was closer than any one individual's guess. Cool, huh?

This financial crisis seems to fly in the face of this concept. I mean isn't that Wall Street specializes in - aggregating financial information? But like a frog being gradually boiled to death, Wall Street didn't see what hit 'em. Despite this failure, I still trust the crowd more than I trust the government. The audacity they have to think that they know how to fix it.

Even the people I know who understand this meltdown and can explain it up and down still don't have a firm opinion on what the government could possibly do to fix it. But ask these individuals what they plan to do and they know. Ask Joe Sixpack on the street what he plans to do and he knows. That's because they will all do what is in their individual self interest. When you aggregate this self-interest, I have faith that the economic tide will continue to rise and we'll get through this mess. If the government doesn't drown us first.