Beware The "Wisdom of Crowds"

My-currency.com is getting a lot of ink after Silicon Valley's VentureBeat coverage of this new real estate site. 

The differentiator of this site is that people can tell the site what they think a piece of real estate is worth.  The opinions of all the people who express an opinion is aggregated into a CrowdValue, which is my-currency's official value of the real estate in question.

The name CrowdValue is loosely based on the book The Wisdom of Crowds by James Suroweicki in which Suroweicki asserts that collective thought is often smarter than the individuals who participate in it.  Really?

"There's No Justice Like Angry Mob Justice"

Jason Kottke uses this line by Principal Seymour Skinner from The Simpsons as an opener to his article about the four characteristics a crowd needs to be a smart crowd: diversity, independence, decentralization, and aggregation.

What gets left out is that crowds are emotional. When you ask the audience in Who Wants to Be a Millionaire or trust the mob in 1 vs. 100, there is no emotion: you either get the question right or wrong.  When you ask someone what they think a house is worth, what happens?

The Market Is an Emotional Crowd

The market is a crowd that determines the price of an item like real estate at any given point in time.  But the market has a fluid opinion, changing as quickly as information flows. 

Given poor information, any group or individual can make a bad decision.  Given the right information, but a highly emotional response to it, you can get an equally bad decision. 

And the crowd is susceptible to fads, cliques, cliches, and conventional wisdom.  The crowd is a generalist, not an expert who understands your situation.  Why would anyone listen to it?

It All Comes Back to You

Whether or not you take the opinion of the crowd is up to you.  You can't always predict what the crowd will like; the crowd can't even predict what the crowd will like.

In fact, Surowiecki acknowledges that the Wisdom of Crowds fails when the crowd is so conscious of and concerned about the opinions of others in the crowd that they begin to emulate the crowd. 

It can be self-fulfilling, so in real estate, you need to ask yourself, "What is my goal?"  If you own a house and your goal is a quick sale, then the crowd's popular opinion is very important. 

If you're buying a house as an investment property or you're looking for something special for your family, the crowd's opinion is much less important --- and possibly detrimental to your goals.

The key, though, is really understand what you need, what you want, and what will make you happy and confident in your decision.  Only then is the Wisdom of Crowds good counsel.