American companies are suffering from a personality crisis. They talk about the virtues of flattened hierarchies and bottom-up organizations, and they laud the genius of the market. But when it comes to what they actually do, companies prefer authoritarianism to democracy. Success, most corporations assume, depends on the efforts of a few superlative individuals. As a result, they treat their CEOs as superheroes, look on most of their employees as interchangeable drones, and remain fond of command-and-control strategies that wouldn't have been out of place in the Politburo. In doing so, firms are neglecting their most valuable resource: the collective intelligence of the organization as a whole.
Instead of looking to a single person for the right answers, companies need to recognize a simple truth: Under the right conditions, groups are smarter than the smartest person within them. We often think of groups and crowds as stupid, feckless, and dominated by the lowest common denominator. But take a look around. The crowd at a racing track does an uncannily good job of forecasting the outcome, better in fact than just about any single bettor can do. Horses that go off at 3-to-1 odds win a quarter of the time, horses that go off at 6-to-1 win a seventh of the time, and so on. Decision markets, like the Iowa Electronics Markets (which forecasts elections) and the Hollywood Stock Exchange (which predicts box office results), consistently outperform industry forecasts. Even the stock market, though it's subject to fads and manias, is near-impossible to beat over time.
One intriguing method of doing this is to set up internal decision markets, which firms can use to produce forecasts of the future and evaluations of potential corporate strategies. Few companies have tried such markets. But the few examples we have suggest that they could be very useful. In the late 1990s, for instance, Hewlett-Packard experimented with artificial markets to forecast sales. Only 20 to 30 percent of employees participated, and each market ran for just a week, with people trading at lunch and in the evening. The market's results outperformed the company 75 percent of the time. Even more impressive was a recent experiment at e.Lilly, a division of Eli Lilly, which set up a market to test whether it was possible to distinguish between drug candidates likely to be approved by the FDA and those likely to be rejected. Realistic profiles and experimental data for six hypothetical drugs were devised by e.Lilly, three of which it knew would be approved and three rejected. When trading opened, the market - made up of a diverse mix of employees - quickly identified the winners, sending their prices soaring, while the losers' prices sank.
The evidence is clear: groups - whether top executives evaluating a potential acquisition or sales reps and engineers analyzing a new product - will consistently make better decisions than an individual. Companies have spent too long coddling the special few. It's time for them to start figuring out how they're going to tap the wisdom of the many.
James Surowiecki (jamessuro@aol.com) is The New Yorker's financial columnist and the author of The Wisdom of Crowds.VIEW
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