Wisdom of the Crowd in the Real World
In Chapter 22, we discuss how the beliefs of a every individual in a group of people can lead to very accurate aggregate beliefs. This phenomenon is called “Wisdom of the Crowd” and plays a huge role in people’s everyday decisions. One study performed on this phenomenon by Jack Treynor, the president of a management firm, asked participants to estimate the number of beans in a jar. In the two experiments performed only three of the participants were closer to the actual number of beans than the average of guesses. The conclusion of this study was that no matter how capable individuals are to assess a situation, the aggregate guess of a group is more likely to be correct.
One real world example of “Wisdom of the Crowd” is in prediction markets. In prediction markets, investors make predictions about future events by essentially betting on an outcome. Investors buy shares of that predicted outcome of a given event, and the market price of the share reflects what the crowd of investors thinks the probability of the outcome is. Prediction markets are starting to become increasingly popular, and have been used to predict many different things. One use of prediction markets has become to predict results of various elections. Many different websites see how investors choose to spend their money on guessing the results of an election and make predictions based on that. These predictions often end up being true because prediction markets are a collective average of the investors beliefs and thus are an example of the “Wisdom of the Crowd” phenomenon.
Another example of prediction markets plays a role in predicting the ability to replicate scientific studies accurately. One main issue in the scientific community has been the ability to replicate studies to verify results. A lot of research done is not replicated due to limited resources. However, a lot of these studies also result in inaccurate results due to human error or more serious things such as fraud. To test the replicability of findings in scientific studies, some scientists have started using prediction markets. They have scientists from a certain field invest on whether a study done in that field has results that are replicable or not. Studies done on this type of prediction market in the field of psychology show that the psychologists had a 70% rate of prediction accuracy. This is once again an example of “Wisdom of the Crowd” because the aggregate of the opinions of each scientist are taken, and thus are more likely to provide a more accurate answer than any one scientist can. This is used by many scientists in various fields to add credibility to studies that are too expensive or time consuming to conduct multiple times.
https://www.seas.harvard.edu/news/2015/11/markets-for-science