Clarity From Crowds™

Perhaps the most important aspect of cognitive diversity is individual independence. Our culture has a tendency to conform to homogeneity, which lowers the ability of individuals to seek out unique information.

The rise of the internet was the saving grace of diversity. Individuals now have the ability to access information located all across the world with the click of a button. Utilizing the internet, groups of people may implement successful collective intelligence strategies, regardless of the size of the group and physical distance between the members.

A couple months ago there was a post by Albert Wegner on the blog for his VC firm, Union Square Ventures. (USV is an early-stage IT venture capital fund located in New York City) His post was titled “Power to the People” and I’ve included an excerpt below:

To us, this appears to be one of the great constants of the web. It is taking power away from existing large institutions and pushing it out to smaller entities and often all the way to individuals.*

When I read his post, it immediately resonated with what we are doing at Frontier Markets – using the web to give power to the people. Specifically, we are empowering our customers by helping them empower their employees.

By making use of this simple concept, firms have been able to add tremendous value to their organizations. For example, one firm used to post annual budgets to their employees and then asked for feedback. The response they got was always the same, “Looks good, boss!” However, at the end of the year when they missed budget by 12%, grumbling could be heard from every employee at the company. Clearly, they did not agree with the original projection, but for them, there’s no incentive for them to stick their neck out and offer a conflicting opinion. Employees are not rewarded for disagreeing with their superiors.

Their problem: By posting the management-developed budget, employees are disincentivized to give their truthful opinion.

The solution: Diversity through independence! Don’t influence your employees by posting management predictions too early. Instead, seek unbiased input from your employees through a means which makes the input anonymous. You’ll be amazed how diverse your employees’ opinions really are, and how accurate your new budgets will be.

*Power to the People

September 22, 2008, Albert Wenger, Union Square Ventures

Related Studies Albert Wegner, Diversity, Independence, Power to the Employees, Union Square Ventures

Our current stock market and economic woes are the result of the market being driven by group think. Before the housing bubble burst, everybody listened to the pundits that preached “the only way for house prices to go is up!” I have a friend who is a real estate appraiser who stopped getting work from the banks and the estate agents when he didn’t appraise the properties for the prices the sellers wanted. There was not a lot of diversity of behavior, and therefore, there was not a lot of protection when that behavior proved wrong.

How did we fix the lack of diversity and the lack of decentralization? We made the economy more centralized. When the financial market crashed a year later, guilty for the same crime of group-think, the federal government intervened with a $700 billion dollar bailout plan, and acquired equity stakes in several major banks nationwide. We are trying to solve a lack of diversity of opinion by making the economy more centralized.

This is a problem.

America’s economic strategy for years has utilized decentralization as one of our key economic strengths. What we call the “U.S. economy” is really just a collection of local, highly specialized economies. Creating and implementing economic policy is highly decentralized to states and cities – each state is responsible for its own economic problems and for attempting to address them.

However, this is not where the money is being spent. Bureaucrats in Washington spend billions of dollars annually on federal programs. These programs fail because they are too high-level and do not address the individual problems facing each region. Rather than allocating money to the states to address their own problems, Washington seems content with wasting our tax dollars on ineffective top-down approaches.

For example, Michigan’s economy and unemployment rate have been struggling for years. Major manufacturing jobs have gone overseas or been consolidated due to improvements in productivity. Rather than spending money on things we actually need, like worker re-education and infrastructure for job development, the Federal Government has continued to push ineffective federally-based programs.

Now more than ever, we need to be employing our greatest economic strengths, but we’re not. Our economy is becoming more and more centralized every day.

Large scale group-think led us into an unstable economic situation, which crashed, causing mass anxiety and a sharp decrease in global stock prices. Simply put, there was no logical reason behind the decrease in stock prices for firms outside of housing and finance. U.S. productivity has continued to grow faster than any other technologically-advanced country, and an increase in exports have helped drive our economy.

The bottom line here is that until we are able to take the proper steps to restore diversity and decentralization to our economy, the stock markets will continue to gyrate, and the markets will not yield equilibrium valuations.

References:

“Why America Needs an Economic Strategy”

By Michael E. Porter

Businessweek November 2008

Related Studies Businessweek, Decentralization, Diversity, Economics, Group Think, Michael E. Porter