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Wisdom of Crowds

Trading Term

The wisdom of crowds is the observation that an aggregate of many independent judgments is often more accurate than the judgment of any single participant, including credentialed experts. The effect is usually attributed to three conditions holding, namely that contributions are decentralized so participants can draw on local knowledge, that viewpoints are diverse, and that judgments are formed reasonably independently of one another. When those conditions break down and participants influence each other heavily, the same aggregation mechanism can produce herding and information cascades instead, which is why market design and breadth of participation matter to whether aggregation improves accuracy.

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