Wisdom of crowds can be of worth to business nous
You might imagine that a website which predicts the news is a strange idea for an internet start-up.
Strange, perhaps, but not as bizarre as it sounds. As reported in Business Telegraph on November 24, the premise behind www.hubdub.com — which was started by a Co Tyrone couple — is that visitors predict the outcome of the major news stories on a given day.
It’s just one of a growing number of prediction sites that rely on the wisdom of crowds.
It’s a phenomenon that was the subject of a book written in 2004 by James Surowiecki and has major implications for businesses, economies, societies and nations.
The wisdom of crowds is not a new idea. A man called Charles Mackay wrote a book entitled “Extraordinary Popular Delusions and the Madness of Crowds” in 1841.
Sir Francis Galton, who, incidentally, devised the first weather map, also alluded to it when he discovered that the crowd at a county fair accurately guessed the weight of an ox when their guesses were averaged.
The average was closer to the true weight than any of the guesses of cattle experts at the time.
Not all crowds are wise, however. Those in which individual members are heavily influenced by others are a prime example, as we have seen in the recent turmoil on the stock markets.
When people in a group emulate each other instead of thinking independently, the system breaks down. The crowd also needs to have all the available information in order to reach a decision.
That’s one of the reasons why the US intelligence community was an “unwise crowd” when it failed to predict the attacks on 9/11.
Agencies failed to share information with their counterparts. They now have a system called Intellipedia that relies on the aggregating of information — see www.fcw.com/specials/intellipedia.
Hubdub is not alone. Among the other prediction sites are Predictify ( www.predictify.com ) and Foresight Exchange ( www.ideosphere.com ). The Hollywood Stock Exchange ( www.hsx.com ) takes the idea and applies it to the world of movies.
You can gauge how seriously this new departure is being taken by the fact that the respected international news agency Reuters has its own page on Hubdub — www.hubdub.com/partners/reuters.
So what relevance does it have in the business world?
Well, several web sites have adapted the model to enable companies to predict the likely outcome of risky or uncertain business decisions.
One such is www.newsfutures.com. Like Hubdub, it allows users to “bet” on an outcome using imaginary money. As a company, NewsFutures also helps large corporations to set up their own prediction markets internally, to capture the foresight of their employees or customers.
While all the sites I have mentioned so far use “play” money to help them get around the American laws against gambling, one or two ask you to invest real cash. In other words, to put your money where your mouth is.
An example is the Irish prediction market Intrade ( www.intrade.com ).
Those involved in paid-for prediction markets believe that staking your own cash helps to enhance the accuracy of the forecasts. The jury is still out on that one.
Whatever the case, prediction markets have shown themselves to be more accurate than opinion polls — partly because they allow participants to see what other people are thinking.
Google ( www.google.com ), Yahoo ( www.yahoo.com ) and Microsoft ( www.microsoft.com ) have all used the technique to allow their employees to bet on which new products will succeed and which will fail.
For the most remarkable illustration of how crowds are wiser than any individual or small group of experts, consider the loss of the US Navy submarine Scorpion in the north Atlantic 40 years ago.
The search for its location was failing until a mathematician, Dr John Craven, asked everyone, from commanders to deckhands, to bet on where it would be. They found the submarine.
It was nowhere near where the Navy had been searching, but was just 220 yards from where the bets said it would be.