Two Business Books

Last week i purchased two excellent books on business which I think ought to be read by anyone with business interests of any size, in any industry. The first is The Wisdom of Crowds by James Surowiecki, a finance columnist from The New Yorker. The second is Reality Check by Guy Kawasaki, venture capitalist, tech guru and the original Apple’s Chief Evangelist. Although the two books differ in scope, both are very well-written, with enough original ideas to be worth the RM50 or so I forked out for each.

The Wisdom of Crowds belongs to the “faddish” group of business books that counts among its members bestsellers like Freakonomics and all titles by Malcolm Gladwell. In fact, if Surowiecki’s name do not appear on the front page and you are to read the first few chapters, you’d swear that it is written by Malcolm Gladwell. No surprises though, both write for The New Yorker, and I’m sure Surowiecki had engaged Gladwell to bounce ideas off when writing this book.

About the book. The central thesis is that crowds, despite their seemingly random and incongruous character, sometimes give the best results and come up with the best decisions, compared to individuals or a small group of experts. Surowiecki, in the introduction, narrated a few instances where collective wisdom trumps expertise in matters of prediction and decision making (one would assume dumb luck is involved, but again, how can dumb luck can creep into a collective decision?). Surowiecki then appeals to statistics, and pointed out how error terms are minimized by taking a lot of data points, which the whole point of scientists repeating experiments and taking the mean data minus the outliers. Of course here the educated readers might object on the ground that random data, the so-called wisdom of crowds, are highly variant, and so the minimization of error terms won’t be much of an improvement.

Imagine the usual jellybean counting contest. A group of people are asked to estimate the number of jelly beans in the jar, and write their guesses on a piece of paper. The winner is the person who made a guess closest to the actual number (which is dumb luck). It would be more interesting to actually keep record of all the guesses and then find the average guess. It would be more interesting still, if we make the sample size large, and the sample group truly random. Then we can gauge the true “wisdom” of the crowd and see whether it’s actually close to the actual number of jellybeans. Of all such jellybean counting contests that is held regularly around the world, it would be interesting to collect data and see whether the wisdom of the crowd actually exists (I’m sure someone has done this research before.)

Well, Surowiecki tells us right in the opening chapter that the wisdom of crowds exists, and he gives empirical proof from history. At one county fair that took place in the 19th century, the onlookers are asked to guess the weight of the heaviest bull that was placed on the stage. When the result was tabulated, it was found that the average guesses only differ with the actual weight by one pound. That is, a perfect guess from the unwashed masses. No group of experts, even those formed by people who spend their professional life dealing with bulls, can get even close to this seemingly random collection of data. There are other examples quoted by the author, I’ll leave it to you to discover them.

In a true Gladwellian fashion, Surowiecki parlays our disbelief before he segues into the “why”s. In the next three chapters, he explains the possible explanations of these phenomena. In particular, he identifies three conditions that a group must fulfill for it to be considered smart: diversity, independence, and decentralization.

What I will explain here is a crude summary of the author’s assertion, which does not do justice to the complex and convincing arguments he puts forth in the book. A diverse crowd is not bogged down by dogma and tendency to converge, which is often the case in a small group of inbred and specialized experts. Independence help in allowing dissenting opinions as well as the status quo to figure in the decision making process. And decentralization plays the role the hidden hand plays in the market — by allowing people to act as free agents of their data (or capital, if we use our hidden hand analogy), people take it unto themselves to find the best solution to a problem. The human nature for competition is prominent even when we are pursuing the same goal collectively (Surowiecki, however, admits that decentralization may not be good in all situations).

The book is divided into two parts: Part I deals with the theoretical aspect of the phenomena (it is really just hindsight, but when people like Gladwell and Surowiecki writes about them, we call them theory). Part II is where he presents the historical data and empirical proof, to support his hypotheses from Part I.

I am a big fan of Surowiecki and a loyal follower of his column in The New Yorker. When I saw this book with his name in the bookstore, I took no time to decide to buy it. It is easy to buy a book knowing that the author has consistently came up with top notch writing week after week in one of the most highly regarded magazines. So far I have not been disappointed. I admit that the content is underwhelming at times: throughout the book several times I can hear my brain screaming “confirmation bias”. But the bottomline is, The Wisdom of Crowds is a great book, worthy of study by business minds small or big, one that can hopefully make you wise to the ways of the crowds.

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I will continue in another post for a review of Guy Kawasaki’s Reality Check.

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