Monday, August 6, 2007

How to use the 'wisdom of the crowds' on Prosper

In The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations, James Surowiecki argues that groups make decisions that are often better than could have been made by any single member of the group.

I've been wanting to write a post about this for awhile and an article in the Boston Globe yesterday further encouraged me. In Sharing the Wealth, the Boston Globe discusses how financial social networks may help people make better financial decisions. Here's an excerpt:





In addition to Prosper, Zopa and Lending Club, some of the social finance sites that the Boston Glove features include:
  • Geezeo/Wesabe - similar to an online version of Quicken where expense information and advice is shared among users
  • Covestor - launched this summer, tracks its members' investment records, allowing people to judge their portfolio's performance against the crowd
  • Zecco - web brokerage with blog and social-sharing features that allow people to share tips and trades

Is the wisdom of the crowds really wise? Sometimes crowds can make very poor decisions because people tend to emulate others and conform. I've seen posts on the Prosper forums where people said they bid on loans simply because they were mostly funded using this reasoning, "how can 30-40 other investors be wrong?" Of course, maybe they just followed the same reasoning you did. Surowiecki argues the best groups have the following attributes:

  • Diversity of opinion - Each person should have private information even if it's just an eccentric interpretation of the known facts.
  • Independence - People's opinions aren't determined by the opinions of those around them.
  • Decentralization - People are able to specialize and draw on local knowledge.
  • Aggregation - Some mechanism exists for turning private judgments into a collective decision.

While group behavior may cause some poor decisions to be made on Prosper, I think there are plenty of examples in the forums where the collective intelligence of the group contributes to better decision making. What do you think? Would any changes in the website structure or technology help facilitate better decision making?

No comments: