Some Microfoundations of Collective Wisdom

Collective wisdom refers to the ability of a population or group of individuals to make an accurate forecast of a future outcome or an accurate characterization of a current outcome. Using basic statistical arguments, it can be shown that the collective will always be more accurate than it’s average member, and that in some circumstances, the collective can be more accurate than any of its members. And yet, collective wisdom need not emerge in all situations. Crowds can be unwise as well as prescient. In this paper, we unpack what underpins and what undermines collective wisdom using two models. The first is the standard statistical model of aggregated signals. The second is a model of agents who possess predictive models. This second approach builds upon and extends traditional statistical approaches to characterizing collective wisdom by demonstrating how collective accuracy requires either individual sophistication/expertise or collective diversity. A lack of both characteristics necessarily leads to breakdowns in collective wisdom.