Wisdom of Crowds

Posted by Jeff Carter
on April 23rd, 2011

Easter is tomorrow, so pardon me if I digress into a little religion. Before you click away, this post isn’t designed to convert anyone, or claim one religions dominance over another, but I want to get you to think.

Last Sunday I went to church. Heard a sermon about Palm Sunday, and intertwined in the sermon was a lot of politics. They happened to come from the far left. The preacher, John Buchanan, is eloquent in his advocacy of far left wing concepts. But, to tell you the truth, his sermon descended into the same talking points that I could have heard on any average day on MSNBC.

His point was that Jesus was political. He took it one step further and basically said that Jesus wants us all to be socialists. That is where main line religions are today. It’s why they are losing members. This brings to mind the concept of the wisdom of crowds.

As we know from economics, there are really two sides to every coin. Anyone can cite and interpret bible verses all they want and twist them to any meaning they want, but at the end of the day the net present value tables never change and 2+2=4. If God invented math, it’s because he wanted to give us at least one thing to hang our hats on. I don’t think Christ advocated for anything, except to take care of your fellow man. How we do that becomes subject to a wide variety of interpretation.

I was emailed this post by Walter Russell Mead and I thought it is what preachers ought to be talking about today. You ought to read it. The world is so variable. Humans like predictable. If you every go to MBA school and they teach you correctly, one of the concepts you get out of the canon of classes is that each and every decision you make has consequences (opportunity costs). As you make those decisions, try and quantify them so that you understand all the “costs” involved. Also take into account the critical concept of variance. The wider the footprint of the statistical distribution you are dealing with, the more expensive your decision becomes. Businesses and humans try to take variability out of their lives. It seems that life keeps throwing variability in our face.

With all this chaos, it seems that it’s much easier to let individuals handle it. Let people find a way to figure out solutions to all the little problems we have. Thinking this way is the decentralized market solution. It’s messy for sure, but it works better in the long run. Many times, we fail, businesses fail. But, the sun comes up the next day and we can try again. New businesses will start.

This individuality is a core concept in Hayek’s wisdom of crowds. Masses of individuals eventually become a crowd of people interacting to create markets. That market will be efficient because everyone is acting in their own self interest. Those individual actions summed into the marketplace will be the best thing for everyone. Society will be raised up more swiftly by a free market than a centrally planned one. It seems counter intuitive, and it is.

Here is a photo of two countries, one centrally planned and one capitalistic. It’s the Korean peninsula.

The centrally planned country is dead.

The centralized planners cannot possible envision all the consequences of their decisions. They can’t possible write the rules of the game correctly so that there won’t be some imperfection in the market that they envision, after all they are simply human like you and I. We aren’t perfect.

Hope you have a good Easter.

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