The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations

Freeloading is the act of benefiting from group-funded programs without contributing to the system. For example, people who evade taxes are considered freeloaders because they benefit from tax-funded systems, such as national pension, without donating their fair share.

Herding describes the behavior of following what the crowd does, assuming that it’s the safest option. In the book, herding is used to explain why experts often choose to minimize risk in their decision-making, even when taking risks would statistically benefit them far more. For example, football coaches almost always insist on making safe plays even when, statistically, the riskier play not only has an immediate higher yield if it succeeds but has a better chance of increasing future success rates even if it fails. The reason for herding is an aversion to risk and a fear of social backlash: It makes professional sense that coaches prefer to lose small by making the safe call than potentially risk failing big by making the riskier call, even if there is a high possibility of winning even bigger.

This describes the phenomenon of groups continuously making decisions based on the first line of information they receive. This can often cause a failure in decision-making for the crowd if they begin taking the information for granted and there was a mistake in the information in the first place. For example, when plank roads were invented, people quickly adopted them and assumed that they would last long and be cost-efficient—this was based on false information by the first plank road developer, but nobody questioned it until costs of upkeep began to creep up. Many adopted the plank road simply due to the information cascade: Other people were buying in, so they followed suit.

Cascades are not based on private information and do not encourage people to express diverse opinions and reach independent conclusions. Crucially, they happen sequentially: People hear from others first before they try to evaluate the situation with their own private information, which means that they’re more inclined to follow the group, whether their private information matches or not. Cascades therefore do not typically contribute to a crowd’s wisdom.

Named after an experiment result by social scientist Thomas C. Schelling, Schelling points designate areas of convergence in people’s expectations which allow them to conform to the group without having to consult the group. These points are often affected by culture. For example, when New York City students were asked where they would go to see someone with whom they did not coordinate a meeting point, the majority responded that they would go to the information desk of Grand Central Station. Schelling points explain why it is possible for independent actors to find solutions to group-coordination problems.

Social proof is defined as a tendency for people to assume that, when a group of people are all performing the same task, there is a good reason for it. For example, in a study conducted by social psychologists Stanley Milgram, Leonard Bickman, and Lawrence Berkowitz, they found that putting an increasingly large group of people on a street who are looking up at the sky will entice more and more passersby to look up as well. This is not the same as groupthink: The passersby are not looking up because they feel social pressure to conform. Rather, they look up because they presume that the group must have a reason for acting uniformly.

This term theorizes that people have a sense of fairness and are willing to punish bad behavior while rewarding good behavior, even when they gain nothing from policing others. It is most clearly demonstrated in the “ultimatum game,” where two individuals are asked to split, for example, $10. One person can make an offer, and if the other person accepts, they each keep their ends of the bargain. However, if the other person does not accept, nobody gets anything. Without strong reciprocity, the first person can offer to divide it into $9 and $1, and the second person would accept because leaving with $1 is better than nothing. However, this is not the case: The game shows that most people will offer to split $5 each and that those who don’t often get rejected for lowballing. This means that people not only have an independent sense of what is just and fair but also are often willing to sacrifice personal gain to enforce it if they believe the other party is behaving badly.