Groupthink Vs Market Think

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In his book, The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations (title long enough for you?), James Surowiecki argues that decisions made by a crowd are generally better than those made by any single individual in the group.

Crowd

Seems like a lot of theoretical hogwash until you see this thesis put to action in the real world via a prediction market. A prediction market (also called a decision market) is, as its name implies, a market created specifically to predict the likelihood of a specific outcome. They are most successful when participants have something invested in their decisions. Money often does the trick, but is not necessary.

The Hollywood Stock Exchange, a prediction market focused around the film industry, demonstrated the potential accuracy of such markets when it went 32 for 39 in predicting 2006’s Oscar Nominees (in the major categories that are the only ones people care about). They didn’t do so bad in 2007 either.

It’s no surprise then that there is a lot of research going on in predictive markets. Preliminary results show they seem to work very well when properly structured.

Contrast the success of prediction markets to another decision making process that involves a group. A recent comment by a reader got me thinking on this subject as he described one of the symptoms of this process.

If you try to satisfy all parties, you’ll end up with mediocre product that does not satisfy everybody.

An even more strong way to state this is to say that trying to satisfy everyone leaves almost everyone unsatisfied.

This is one typical result of a decision making process known as Groupthink. Another colorful term used to describe it is decision by committee. These terms do not, by any means, have a positive connotation.

Group
Think 

There seems to be a paradox here between the power of markets and the ineptitude of Group Think. Why do these two somewhat similar means of decision making have such a wide variance in accuracy?

Perhaps counter-intuitively, it has a lot to do with the coercive effects of seeking consensus in decision making. Group think is often hamstrung by seeking consensus whereas participants in an effective market are largely independent of one another.

Before I continue, let me head off that insightful comment on how I am trying to promote anarchy and save your fingers the pain of some typing by pointing out that this is not an indictment of all consensus driven decision making. In many cases, consensus is absolutely required. It doesn’t help if a decision is optimal but nobody is willing to participate in the result of the decision. This sort of decision making is especially essential in one particular form of decision making - negotiations,which is well covered by the book Getting to Yes: Negotiating Agreement Without Giving In.

The problem lies in applying negotiation to make decisions that should not be made by consensus. At least not without applying non-consensus based fact gathering first, so that negotiations can occur using data gathered in a dispassionate manner.

So what makes groupthink particularly inadequate? Social psychologist Irving Janis identified the following eight symptoms of groupthink that hamstring good decision making:

  1. Illusion of invulnerability – Creates excessive optimism that encourages taking extreme risks.
  2. Collective rationalization – Members discount warnings and do not reconsider their assumptions.
  3. Belief in inherent morality – Members believe in the rightness of their cause and therefore ignore the ethical or moral consequences of their decisions.
  4. Stereotyped views of out-groups – Negative views of “enemy” make effective responses to conflict seem unnecessary.
  5. Direct pressure on dissenters – Members are under pressure not to express arguments against any of the group’s views.
  6. Self-censorship – Doubts and deviations from the perceived group consensus are not expressed.
  7. Illusion of unanimity – The majority view and judgments are assumed to be unanimous.
  8. Self-appointed ‘mindguards’ – Members protect the group and the leader from information that is problematic or contradictory to the group’s cohesiveness, view, and/or decisions.

One symptom not listed here, but probably fits in with #6 is the fear of causing offense.

One theme in common in the list is that many of these symptoms are the result of seeking some form of consensus with others within the group. The net effect is that all of these symptoms provide incentives not to deviate from the group.

Prediction Markets counter these symptoms through independence and proper incentive. Because the participants in a market are not directly working together, there is no way for peer pressure to burrow itself into the decision making process. There is no fear of offending others in such a market. Putting something valuable (such as money) on the line (or having a huge investment in the correct outcome, such as predicting disaster) has an eye-opening habit of making people truthful and helps to avoid self-censorship etc…

Another necessary factor in the success of markets, as pointed out in an insightful comment to this post, is diversity. Markets and committees that lack diversity of viewpoint fail to take advantage of all available information in a meaningful way and succumb to a form of tunnel vision. This type of phenomena is very evident in a leader who surrounds him/herself with sycophants and thus makes decisions based on what they want to hear rather than fact.

Prediction markets are not perfect and are not suitable for all decisions. In fact, they are probably not suitable for most decisions as the cost to set up a market isn’t justified for everyday decisions like whether you should get the bottle of beer or the pitcher of sangria.

However, understanding what makes predictive markets work and what the symptoms of groupthink look like can be a great benefit the next time you are making a decision within a group and start to see groupthink emerging.

Technorati Tags: Decision Making,Consensus,Predictive Markets,Groupthink

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15 responses

  1. Avatar for Mads Kristensen
    Mads Kristensen November 12th, 2007

    Very interesting and good writing. I'm wondering what your experience is with this in regards to open source projects like SubText. You have the masses (the community) pushing for features and then the team and architects that ultimately makes the decisions. How do you think it influences the SubText project and open source in general?

  2. Avatar for Ed
    Ed November 12th, 2007

    Not sure if you're into football (soccer) but how's this for a group decision:
    http://news.bbc.co.uk/sport...
    http://www.myfootballclub.c...
    Apologies for completely non-software related links.

  3. Avatar for The Other Steve
    The Other Steve November 12th, 2007

    I was once called in to a marketing survey at the Mall of America, becuase they were trying to figure out how to attract more locals. This was a group of 10 men age 25-40, the target audience of this particular program.
    When prompted, 9 men responded with things like "Oh yeah sure, if you brought in sports stars I would come here with my son to see them." I responded "Wouldn't make a difference. Only reason I come here is if there is something I want to buy that I can't get anywhere else, or it's a convenient location to meet buddies for a beer."
    I was the only honest person in the bunch.
    The rest of the group all fed upon one another, prompted by the marketing person. They just wanted to agree.
    Now I was in a focus group once where we got into a big fight, but that's because it involved politics about low priced housing.
    The problem is to many companies rely upon those marketing focus groups to make product decisions, not realizing that the results are skewed from the start to support their preconceived notions. Then they wonder why nobody shows up to buy when the stats had 80% favorable.

  4. Avatar for mattflo
    mattflo November 12th, 2007

    I highly recommend Surowiecki's book. Decision/prediction markets are fascinating phenomenon. His contrast to corporate structure is also insightful.
    You mentioned independence being critical to prediction markets success. Diversity is another critical component.

  5. Avatar for Haacked
    Haacked November 12th, 2007

    @mattflo - Good point that i meant to make and forgot! I added it to the blog post.

  6. Avatar for Haacked
    Haacked November 12th, 2007

    @Mads - Fantastic question! Probably worth a post in its own right. Some quick thoughts:
    I think it's possible to foster a group culture that avoids some of the symptoms of group think. For example, egoless programming is one approach to this. We all want the best technical solution to a problem.
    But in terms of how the core group makes internal decisions, I think having a strong vision is important. I have a particular idea of how I want Subtext to be and I want to stick to that at the risk of making some people unhappy, with the hope of making those that get my vision really happy.
    I think you do the same with BlogEngine.NET because I know there are certain philosophical differences in approach you and I have (namely in regards to 3rd party dependencies). I think that's a good thing!

  7. Avatar for Haacked
    Haacked November 12th, 2007

    p.s. When I say, "I think that's a good thing", I mean the fact that we have different opinions and are sticking to our respective vision is a good thing.

  8. Avatar for Mark de Jeu
    Mark de Jeu November 12th, 2007

    Excellent leadership trumps them all.
    Groupthink is beautifully expressed at http://www.despair.com/meet....
    I am afraid miss the association between predictive markets and corporate decision making, especially related to setting vision and direction from a gifted leader. I don't see excellent products coming to us (ex. the iPod, et.al.) coming to us from crowd wisdom.
    While crowds may predict well, I see mediocrity (or worse) from the crowd when it comes to design, direction, and leadership.
    I guess I'm just missing how prediction markets are related at all to the business/product decision making process.
    As an example, I would rather have Rob in charge of SubSonic's direction than having a crowd in charge. Give me a talented leader over a crowd any day.

  9. Avatar for CP
    CP November 12th, 2007

    This goes on in m

  10. Avatar for Jon Galloway
    Jon Galloway November 13th, 2007

    Very thought provoking post!
    I think there's an interesting aspect to the granularity of the decisions the groups are making. For instance, the prediction markets for the Oscars didn't design a movie star, they guessed which of an existing set of stars were most likely to win an Oscar. If you start averaging at the feature level, you end up with a mess, but if you use popular input to decide between less granular options (overall product visions, feature sets, etc.), you can get the advantage of popular input without creating a mess.
    The average of everyone's favorite color is probably an ugly brown color, which wouldn't be anyone's favorite color. Better to come up with a short list of popular colors and have a winner take all vote.
    As "The Other Steve" pointed out, many people lie (unintentionally) when directly surveyed. It's much better to collect votes from actual measured input - A/B tests, feature use tracking in software, etc. If you asked me what music I've been listening to lately, I guarantee I won't be as accurate as my last.fm profile.

  11. Avatar for DotNetKicks.com
    DotNetKicks.com November 13th, 2007

    You've been kicked (a good thing) - Trackback from DotNetKicks.com

  12. Avatar for The Other Steve
    The Other Steve November 13th, 2007

    Galloway is right.
    A movie designed by committee would involve a giant battle with ships and planes and lots of guns with a moving love story.
    Also known as the movie Pearl Harbor.

  13. Avatar for Haacked
    Haacked November 13th, 2007

    @Jon - but one thing to consider is that well designed markets aren't designed to get the average of people's favorites. They're designed to get what people actually think is best, all biases aside (as much as humanly possible of course).
    So while there are certain actors I don't like, I might buy their stock because I know they will rise in price.
    Another case in point is the "Foreign Policy" market which was unfortunately labelled a terrorism market. They had foreign analysts buy shares of how, when, and where the next attack would occur. When prices went up on a "share", they knew there was a worry there.
    Markets are a great way to dissemminate intel in that case.

  14. Avatar for The Other Steve
    The Other Steve November 13th, 2007

    Actually it was called the Policy Analysis Market, and it suffered from numerous problems. Again, because a market is useful at selecting the best product or idea, not necessarily in predicting. I've watched political markets, which claim to predict, and they generally just track conventional wisdom.
    There's utility in markets, but just because you have a hammer doesn't mean everything is a nail. Sometimes an educated guess can be way more useful.

  15. Avatar for Leadership Expert
    Leadership Expert March 30th, 2009

    Its true, prediction markets are extremely accurate, because when people have a vested interest to predict correctly - suddenly there becomes little conflict of interest such as in decision by committee.. and it becomes every man trying desparately to guess correctly. Which has only one outcome - prediction markets offer great thought leadership on what the likely outcome of events or decisions will be.