The Stupidity of Crowds

Last Updated Oct 15, 2008 11:41 AM EDT

Forget the wisdom of crowds -- Stanford's Jeffrey Pfeffer puts forward some compelling reasons to steer away from the herd if you want to build a sustainable business in volatile markets.

The Cassandras forecasting recession could be wrong, he argues -- after all, the current financial turmoil, and the government's intervention, have no real precedent. But can fear alone cause companies to talk themselves into a downturn?

"Business leaders can't control the macro-environment, so they shouldn't try," says Pfeffer -- echoing an argument by UK-based media boss Alex Connock of Ten Alps, who likens most businesses to a fisherman at the end of a pier. "You don't really need to know about the currents in the North Atlantic to catch a few fish."

So why do companies continue to allow themselves to be buffeted by the winds of fortune? Working at polar extremes, the lure of short-term gains drives businesses to a sort of Sisyphean management style that builds up the business during good times, only to cut back drastically in a downturn.

Slow, sustainable growth is the rational choice. But is it realistic? As Pfeffer himself observes, crowds are not rational. Or rather, individuals influenced by crowds become irrational.

The brain is hardwired to follow the herd, says neuroscientist Gregory Berns in his book, Iconoclast. Our minds automatically recognise the 'law of large numbers' -- the fact that, statistically, groups are more likely to be accurate than individuals -- and act accordingly.

Individuals frequently act against their better judgement in order to conform, as Berns demonstrates. He builds on well known experiment by Solomon Asch by using fMRI imaging to chart what goes on in the brain when an individual is called upon to speak out against a crowd.

What Berns discovers is that fear drives individuals to capitulate to the majority, even if they know the group's wrong.

So how do you avoid falling prey to the madness of crowds? You have to start by tackling the fear that discourages dissent. Berns suggests 'cognitive reappraisal' -- fear is associative and can be stripped of its power in a different context or by repeating whatever causes you to be afraid.

In other words, if you continuously voice your disagreements in a group, you should overcome the fear of going against the grain.

Some strategies to combat destructive group-think 1. On committees or boards, try using a rating scale to allow individuals to make decisions.
2. Allow people to vote using closed ballots.
3. Hire people for their ability and willingness to dissent.

Sometimes, all you need to do is find one other dissenter to break the spell: "Although two people may not be sufficient to sway the group's opinion, having one ally is all that is needed."