Last month, I interviewed psychologist Daniel Kahneman, who won the Nobel Prize in economics in 2002 and recently authored the book Thinking, Fast and Slow.
In this clip, Kahneman and I discusses the idea of the "wisdom of crowds." Have a look (transcript follows):
Morgan Housel: Do organizations, or even small groups of people, make better decisions than individuals?
Dr. Kahneman: Not necessarily, I think. There is a class of problems where groups, where the wisdom of crowds is where averaging really works, and that's when the errors that people make are completely uncorrelated. So when different people make, prone to make very different errors, then the errors will tend to cancel them out, and the law of large numbers will work, and so on, so you get an advantage there.
But when you have problems where the biases are shared, then actually groups could be worse than individuals because people finding that others agree with them become even more overconfident.
Morgan Housel: So that's confirmation bias.
Dr. Kahneman: Yeah.
Morgan Housel: So talking to people necessarily isn't going to help your decision making, so you should want to talk to people who disagree with you, is that...?
Dr. Kahneman: You should talk to people to disagree with you, and you should talk to people who are not in the same emotional situation you are.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.