James Surowiecki first popularized the notion of the “wisdom of crowds” in his book by the same name. He provided many interesting examples of how certain forms of decision making by large (non-expert) groups could prove more accurate than predictions by expert individuals. He surmised that this sort of crowd decision making works best when the members are independent individuals with diverse perspectives on the problem or situation, and the ability to communicate and learn from each other.
Here are some examples of crowd wisdom at work:
HSX – This is a awebsite where individuals can “buy and sell” movies in production, but not yet released. The traders use fake money to establish their portfolios. They buy movies they think will be successful and sell those they think will not. This movie futures exchange has proven surprisingly good at predicting box office successes and choosing Oscar winners. In fact, as Surowiecki reported, it has outperformed the Hollywood insiders who routinely make such predictions.
Marketocracy – This website allows members to create virtual investment portfolios with $1 million of fake money. The members number about 55,000. Based on the investments in the virtual portfolios of its top 100 most successful members, the company launched a real fund with $44 million and regularly outperforms the S&P 500 index.
Iowa Electronic Markets – This site has been in operaiton since 1988 and is run by the University of Iowa’s College of Business. On the site, visitors can place bets on various types of elections by buying and selling candidate futures to predict the percentage of votes candiates will get. In studies of it performance in elections between 1988 and 2000, the IEM outperformed the national polls, including months in advance of the actual election.
This crowd intelligence has intriguing possibilities for the book industry. One could imagine a site where visitors could buy and sell futures on books well along the publishing timeline but not yet released. If crowd intelligence lives up to its promise, it might be an interesting way to predict potential winners. Of course, the predictive value of the futures activity would ultimately be vetted or discredited by hard sales data that comes later from sources such as BookScan.