The Wisdom of the Crowd Theory and Crowdfunding

There is the idea called the “Wisdom of the Crowd” and the idea is you can take the most sophisticated experts in any field and put it out to the consciousness of the world a crowd of a thousand NON experts will make better decisions.  They’ve done multiple experiments around this concept.  For example, they asked non expert to guess the average weight of cow versus experts and the crowd wins.  Another famous example is using the online game FoldIt, 57,000-plus players helped scientists at the University of Washington solve a long-standing molecular biology problem within three weeks.

Individual decision makers are subject to biases. You are a factoring guy and did a loan with a sunflower seed company and got burned a few years ago and now are gun shy on non organic food.

Any loan above 250K plus has manual underwriting to some degree. And our decision making has many inherent biases.  Some examples include

  • Overconfidence – we are just plain too confident in our own abilities
  • Confirmation bias – we tend to listen to only information that proves our points
  • Clustering illusion – the tendency of seeing patterns in random events, like the number 7 turns up 5x in row on the craps table and you see a pattern
  • Recency effect – we weigh the latest information more heavily than older data.

There are many more. But the Wisdom of the Crowd really works because of the diverse opinion of each person’s private information, their independence of those opinions, and the aggregation of the collective view.

I would suggest reading The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations, a book written by James Surowiecki and published in 2004.

Crowdfunding is based on the Wisdom of the Crowd. KickFurther help companies grow with inventory fundraising from a crowdfunding model and vets every offer by 1,500 investors.  The users can ask the business owners what is relevant.

What do others think? When you aggregate thousands of decision makers to leverage a whole group of expertise, do we make better decisions?

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