Wisdom of Crowds

The wisdom of crowds is an empirical observation first systematically documented by Francis Galton in 1907, when he found that the median estimate of a county fair crowd guessing an ox's weight was remarkably close to the actual value. James Surowiecki popularized the concept in his 2004 book of the same name, arguing that under the right conditions, large groups are collectively smarter than any individual member — even experts.

Prediction markets are often described as a mechanism for harnessing the wisdom of crowds because they aggregate information from many participants with different backgrounds, data sources, and analytical frameworks. The financial incentive ensures that participants who know something relevant have a reason to trade on that knowledge, while those who are wrong lose money — creating a selection mechanism that amplifies good information.

However, the wisdom of crowds has important prerequisites: participants must be genuinely independent (cascades and herding can destroy crowd wisdom), they must have diverse information, and there must be some mechanism for aggregation. When these conditions break down — as happens with illiquid markets, manipulation, or strong social influence — crowds can be systematically wrong. This is why extremely liquid, politically controversial markets sometimes deviate significantly from poll-based estimates.