The Crowd Knows Best

2004/6/22 #859197: People wait in line for "My Life" Bill Clinton book signing, New York, photo

Who knows best: The bookie or a random bunch of bettors? Plugged-in Wall Street hotshots or people like you and I?

The answer, CBS News correspondent Serena Altschul says, may surprise you.

"Groups of people can be remarkably smart. And the really strange thing is they can actually be smarter than the smartest person within them," believes author and New Yorker business columnist James Surowiecki.

Surowiecki, is not only a crowd pleaser with a best-selling book, he's a crowd champion. All that elbowing and jostling, he says, actually is a good thing.

"If you figure out a way to tap into the knowledge that say, a large group of have; you could really, dramatically improve like, the decisions you make, predictions you make. You can actually, in some ways, even forecast the future," he says.

Surowiecki admits that this logic diminishes the role of experts and authoritative figures, adding that, "it also goes against everything we've been taught about what groups are like."

And Surowiecki is not the first person to recognize this counterintuitive phenomenon. At the turn of last century, a British scientist named Francis Galton came across a crowd of fairgoers guessing the weight of oxen. He collected the guesses and averaged them out. The result, Surowiecki says was that the group guessed the ox weighed 1,197 pounds, one pound short of the actual weight.

This precision, Surowiecki says, is no fluke, rather, it is a trait groups exercise again and again.

On the game show "Who Wants To Be Millionaire," it happens almost every day. Contestants can choose advice from a lifeline expert or poll the audience

"The experts do pretty well -- they get the answer right about two-thirds of the time," Surowiecki says, "but the audience gets the answer right 91 percent of the time."

And there's nary a furlong between horse gamblers and stock traders.

What you're essentially doing when you are buying a stock, whether you know it or not, is offering up your judgment as to how much that stock is really worth. It is very hard for even the smartest money managers to do better than the stock market as a whole.

Which is why index funds, which hold a broad range of stocks with few changes, consistently beat managed funds.

John Bogle agrees and he should know. He's the legendary founder of The Vanguard Group, the second-biggest mutual fund in the world.

"In a given year, the index fund will beat 60 percent of managed funds and over decade, 89 percent," Bogle says.