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The Promise of Collective Intelligence

Maybe all the emphasis on top talent is misguided. Maybe good decision making depends less on having a canny, visionary strategist in the CEO slot than it does on knowing how to listen to employees via new ideas such as internal decision markets.

At least, that’s one possible implication of the “collective intelligence” concept, recently popularized in James Surowiecki’s The Wisdom of Crowds. In the book, Surowiecki argues that large groups of people often make better choices than smart and knowledgeable individuals.

The classic example is the jelly-beans-in-a-jar prediction. Ask a group of people to estimate the number of beans in a jar, and most of the answers will be pretty far off base. But their average answer will be quite close to the truth—in fact, closer than the prediction of most, and sometimes all, of the people who guessed. “Under the right circumstances,” Surowiecki claims, “groups are remarkably intelligent, and are often smarter than the smartest people in them.”

In another example, Professor Paul Johnson of Columbia Business School asked his students to guess who would win the Academy Awards. In most of the years in which he’s done the exercise, no individuals have out-predicted the average student answer. In fact, wrote Johnson, “the consensus did remarkably well despite the low score of the average student.”

Free markets are the quintessential example of collective wisdom at work, which is why so-called decision or prediction markets (also known as information markets or events futures) are grabbing the attention of decision makers. Such markets appear online as places where people can literally place bets on the future, ranging from the outcomes of sporting events to political elections. For example, such online trading sites as Iowa Electronic Markets and TradeSports.com turned out to be more accurate than any poll in their ability to predict the electoral vote count of the last U.S. presidential election, one of the closest of the last century.

In The Wisdom of Crowds, Surowiecki suggests that companies might benefit by leveraging internal decision markets rather than relying solely on the decision-making abilities of top leaders. He argues such markets can help companies make a range of decisions “from deciding among potential new products to building new factories to forecasting demand to setting prices to contemplating mergers.” These are the kinds of decisions, he adds, that are usually made by CEOs alone. But they’re also the kinds of decisions that can go wildly awry. About two-thirds of mergers, for example, fail. “This suggests that, at the very least, CEOs are not in general extraordinary decision makers,” Surowiecki writes.

Some companies have, in fact, been experimenting with internal decision markets. The German corporation Siemens used such a market to accurately predict that the company would fail to meet a software project deadline, apparently contradicting managers who said it would. In another case, Hewlett-Packard found that an internal market predicted printer sales better than did more traditional forecasting methods.

The principles and mechanisms of these kinds of markets might even be applied to HR products and services in the future, suggests a recent paper in Human Resource Development Review. Companies might, for example, use internal markets to gauge the potential success of a new HR service or to get a better idea of how long an HR project might take to complete.

Of course, such markets aren’t infallible decision-making tools. One recent study suggests that participants in such markets sometimes put too much emphasis on both likely and unlikely events and not enough emphasis on events of “intermediate probability.”

What’s more, markets must be well designed and implemented if they’re to work right, and they’re better at predicting some kinds of events than others. For example, complex events or events where inside information plays a decisive role generally don’t attract many trading funds. Other influential factors include the extent to which buyers and sellers have access to information about the event, the ways in which buyers are linked to sellers, and whether or not real money, as opposed to artificial currency, is used for trading purposes.

More generally, collective intelligence depends on four basic conditions, according to Surowiecki. First, there has to be diversity of opinion. That is, each member of the group should have “some private information, even if it’s just an eccentric interpretation of the known facts.” Second, participants need to think independently of one another. Third, they need to be decentralized, able to gather information in their own locality. Fourth, there has to be some method for aggregating all participants’ opinions and turning them into a piece of collective wisdom.

Publishers Weekly sums up, “The diversity brings in different information; independence keeps people from being swayed by a single opinion leader; people’s errors balance each other out; and including all opinions guarantees that the results are ‘smarter’ than if a single expert had been in charge.”

So, in the future, perhaps the largest battles in the so-called war for talent won’t be fought over a scarcity of highly educated, highly paid, executive-quality managers. Perhaps the biggest battles will be to see which organizations are most successful in harnessing the collective wisdom of their entire organizations.

This article is excerpted, by permission of the publisher, from The Human Resource Institute. For more information, visit: www.hrinstitute.info.