So Much for The Wisdom of Crowds

Image courtesy of NYTimes.com

It is somewhat vexing to see the hounds jumping on Alan Greenspan in the rush to assign blame for the financial crisis to a single individual. That’s the way of politics, I suppose, that many feel the need to find someone to single out, someone towards whom we can all point an accusing finger so we can, ourselves, feel absolved.

But for those with an interest in collaboration and how groups of individuals make decisions and work together, this whole mess brings up a question of a favourite text on collective decsion making; Surwiecki’s The Wisdom of Crowds.

What made me think of this was a quote from Greenspan in his Congressional hearing; “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.”

What he’s talking about is a fundamental belief that through aggregated or collectivized self-interest and rational decision making on a distributed basis, better decision will be made…also known as the wisdom of crowds, group genius, or whatever you want to call it.

This, for me, points to a caveat for those who believe in collaboration and collective action as the best way to get things done:

1. actors will likely only act rationally when rational micro-action can be expected to happen within a context of rational macro-outcomes
2. collective action is effective only when the environment supports self interest that is rational

There’s a lot of overlap between those two things, but some of the distinctions, I think, are important. Ultimately, point #1 should create the “environment” for point #2. The issue is that within an irrational environment, there is little incentive to behave rationally, and in the case of the stock market and the mortgage bubble, there was significant (short term, as it turns out) incentive to behave in an irrational way.

If I think of the implications of this model for large organizations, it would seem that major organizational change can only really happen effectively if people can be assured that making good decisions within their part of the world will be met with collectively desirable outcomes at a macro level.

The lesson for all of us, and Mr. Greenspan, is that – as he suggests – we must continue to rely on the rational self interest of individuals and institutions, but it is the responsibility of leaders (and government) to set a rational context for those decisions.