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Saturday, May 21, 2011

"Sharing Information Corrupts Wisdom of Crowds"

Interesting to think about this in the context of markets as aggregators of information:

Sharing Information Corrupts Wisdom of Crowds, by Brandon Keim, Wired: ...In a new study of crowd wisdom — the statistical phenomenon by which individual biases cancel each other out, distilling hundreds or thousands of individual guesses into uncannily accurate average answers — researchers told test participants about their peers’ guesses. As a result, their group insight went awry.
“Although groups are initially ‘wise,’ knowledge about estimates of others ... undermines” collective wisdom, wrote researchers led by mathematician Jan Lorenz and sociologist Heiko Rahut of Switzerland’s ETH Zurich... “Even mild social influence can undermine the wisdom of crowd effect.”
The effect ... has been described for decades... Lorenz and Rahut’s experiment ... recruited 144 students from ETH Zurich, sitting them in isolated cubicles and asking them to guess Switzerland’s population density, the length of its border with Italy, the number of new immigrants to Zurich and how many crimes were committed in 2006.
After answering, test subjects were given a small monetary reward based on their answer’s accuracy, then asked again. This proceeded for four more rounds; and while some students didn’t learn what their peers guessed, others were told.
As testing progressed, the average answers of independent test subjects became more accurate... Socially influenced test subjects, however, actually became less accurate.
The researchers attributed this to three effects. The first they called “social influence”: Opinions became less diverse. The second effect was “range reduction”: In mathematical terms, correct answers became clustered at the group’s edges. Exacerbating it all was the “confidence effect,” in which students became more certain about their guesses. ...
Lorenz and Rahut ... think this problem could be intensified in markets and politics — systems that rely on collective assessment. “Opinion polls and the mass media largely promote information feedback and therefore trigger convergence of how we judge the facts,” they wrote. The wisdom of crowds is valuable, but used improperly it “creates overconfidence in possibly false beliefs.”

In the experiment, people are giving honest answers, and they aren't actively trying to move collective opinion one way or another. In the political realm, that's not the case, and the deterioration of collective wisdom could be even worse.

    Posted by on Saturday, May 21, 2011 at 09:27 AM in Economics, Market Failure | Permalink  Comments (17)

          


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