Smart mobs beat dumb CEOs

Surowiecki's faith in the wisdom of crowds rests on what he calls "a mathematical truism." If you ask a large group of diverse, independent people to predict or estimate something, when you average out their answers "the errors each of them makes ... will cancel themselves out," he writes. "Each person's guess, you might say, has two components: information and error. Subtract the error and you're left with the information."

This simple fact can lead to remarkable results. Surowiecki points out, for instance, that within minutes of the explosion of the space shuttle Challenger, on Jan. 28, 1986, the stock market collectively determined which company to blame for the accident -- and it got the right answer. While share prices of the four major contractors who'd worked on the shuttle declined after the accident, the stock of Morton Thiokol, the contractor that built the Challenger's solid-fuel booster rockets, slipped the most. By the end of the trading day, the value of its shares had fallen by almost 12 percent, while the other three contractors had dropped by around 3 percent.

The shares of Morton Thiokol did not fall so precipitously because it had been publicly blamed for the accident, or because insiders at the firm were dumping stock; as Surowiecki notes, on the day of the explosion, there were no public comments indicating that Thiokol might bear some responsibility for what had happened, and even rumors concerning possible causes of the disaster did not implicate the company. Still, for some reason, the market chose Thiokol. And six months later, the commission investigating the disaster also blamed Thiokol. It was faulty O-ring seals on Thiokol's booster rockets, the commission determined, that led to the Challenger's demise.

How did the market correctly pick which firm to blame? Surowiecki concedes that it's possible that someone in the market had inside knowledge of the defective O-rings. "But even if no one did, it's plausible that once you aggregated all the bits of information about the explosion that all the traders in the market had in their heads that day, it added up to something close to the truth," he writes.

Surowiecki is (understandably) captivated by this power of the market to aggregate different peoples' ideas into a single "truth." In business, as in much of the rest of life, predicting the future would be extremely valuable. Markets, Surowiecki says, can sometimes do an astonishingly good job of predicting which one of a number of different outcomes might come to pass. For some reason, though, many people, even businesspeople, shun markets; when we want to know what will happen in the future, we almost instinctively seek out experts rather than the crowd.

While corporations rely on the stock market to raise capital, Surowiecki points out that what's done with that capital in most American businesses is often decided not by a market but instead by the whim of one "expert" -- the CEO. And in the 1990s, these men were anointed as the superheroes of American business, pulling in obscenely large salaries and becoming cultural celebrities as a result of their supposed business prowess.

The problem was not just the hype, Surowiecki writes. "The problem was that people actually believed the hype, taking it for granted that putting the right individual at the top was the key to corporate success." But this idea is deeply misguided. There is precious little evidence to indicate "that single individuals can consistently make superior forecasts or strategic decisions in the face of genuine uncertainty," Surowiecki writes. Among academics, there is a debate over whether CEOs can make any dent on corporate performance, but even those who say that CEOs matter point out that their influence can be either positive or negative. For instance, two-thirds of all corporate mergers -- almost always the brainchild of a lone CEO -- fail. "This suggests that, at the very least, CEOs are not in general extraordinary decision makers," Surowiecki writes.

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