Though referring frequently to Suriowecki’s book The Wisdom of Crowds, Page maintains that “crowds are not wise, but crowds of models are.” (p. 341) This is an important distinction. “The best predictions should come from collections of diverse models. These models should parse reality differently. They should rely on interpretations based on diverse perspectives that look at different attributes in the same perspective, or interpretations that slice up the same perspective into different clumps. If so, each model will be accurate, and the collection of models will be diverse. This combination of accuracy and diversity makes for a wise crowd.” (p. 235)
Page offers a test recipe for creating a crowd of models in such small groups as juries and boards of directors; in larger groups diversity is almost guaranteed. He also acknowledges that “individuals can amass their own crowds of models” and points to Buffett’s sidekick Charlie Munger who “bases his investment decisions on what he calls a lattice of mental models: a collection of logically coherent diverse models that combine to help him make accurate forecasts. His crowd of models, we can only surmise, is an intelligent, diverse bunch.” (p. 235)
Page’s book is so lush, combining what one reviewer called a “dazzling eclecticism” with scientific rigor, that it’s impossible to do it justice in two blog posts. Nonetheless, I will limit myself to just one more market-oriented insight—how a wise crowd differs from a diversified portfolio containing “rainy day bonds, sunny day stocks, and cloudy day cash.” (p. 340) Diversification pairs holdings to “states of the world”; stocks pay off in sunny weather, bonds in rainy weather, and cash is handy to have during cloudy times.
By contrast, a group of people working together to solve a problem are not simply trying to realize a state. One person makes an improvement, and others may build on this improvement to introduce further improvements. “Diverse perspectives and diverse heuristics apply sequentially. . . . Diversity is superadditive.” (p. 340) An example that has brightened the lives of many kids: at the 1904 World’s Fair there was an array of food vendors. “Attendees could choose from a diverse portfolio of alternatives. Unfortunately, one day the ice cream vendor ran out of cups. Ernest Hami, a Syrian waffle vendor in the booth next door, rolled up some waffles to make cones. The rest, as they say, is history. The parts of the portfolio—the waffles and the ice cream—combine to create something new and better, the ice cream cone.” (pp. 340-41) Actually, the parts didn’t combine; a vendor combined them. Investment bankers can create new products out of combinations or slices of old products, but an individual diversified portfolio just rides out changes in the weather, more or less successfully.
And there are dog treats and DOG TREATS!