[music playing]

Man: Come on, one!

Man: Come on, two!

Man: $16 voucher.

Interviewer: Who knows best— an expert bookie or a random bunch of betters?

[bell ringing]

Plugged-in Wall Street hot shots or people like you and me? How about the smartest man in the world or these guys? The answer may surprise you.

James Surowiecki: If you can get the right circumstances, groups of people can be remarkably smart. And the really strange thing is they can actually be smarter than the smartest person within them sometimes.

Interviewer: It's just a theory.

[laughing]

James Surowiecki is not only a crowd-pleaser with a bestselling book and a business column in The New Yorker, he's also a crowd champion— all that elbowing and jostling, he says, actually is a good thing.

James Surowiecki: If you figure out a way to tap into the knowledge that, say, a large group of people have, you can really dramatically improve the decisions you make, predictions you make— you can actually, in some ways, even forecast the future.

Interviewer: This goes against pretty much everything we've all been taught.

James Surowiecki: Yes.

Interviewer: About what authority means— what does it mean to be an expert? What does it mean to be smart and wise?

James Surowiecki: Right. Yeah, I think it— and it also goes against everything we've been taught about what groups are like.

Man: [inaudible], head up.

Interviewer: James Surowiecki is not the first person to recognize this counterintuitive phenomenon. At the turn of the last century, a British scientist names Francis Galton came across a crowd of fair goers guessing the weight of an ox. He collected the guesses and averaged them out.

James Surowiecki: And the group had guessed that the ox would weight 1,197 pounds. And it actually weighed 1,198 pounds.

Interviewer: And this is not a fluke.

James Surowiecki: Not a fluke.

Interviewer: We decided to try an experiment ourselves in Times Square.

So the idea is people are going to guess how many jelly beans are in here.

James Surowiecki: Right.

Interviewer: Do you want to have a guess to how many jelly beans are in here?

Child: Probably, like, 2000.

Man: 390.

Woman: 2,784.

Man: 334 in there.

Man: Like 3,000.

Woman: 743.

Woman: 2,005.

Woman: 1,011.

Man: 10,000.

Interviewer: Is what you're saying that this crowd is smarter than the average person?

James Surowiecki: Oh, yeah. The crowd collectively will be much smarter than the average person. Now—

Interviewer: How many are really in there? We'll tell you the correct answer later. But meanwhile, it's off to the races— where playing the odds usually pays off.

Wow.

James Surowiecki: Wow, that is extraordinary.

Man: Come on, baby!

James Surowiecki: In some ways, it's actually the perfect example, because the odds on horses— which you can see back there— that are set at the racetrack are set purely by the crowd. So every single person who bets actually affects the final outcome.

Interviewer: So compared to any other kind of market or futures or— this is one of the best examples.

James Surowiecki: Yeah, it really is one of the best.

The number four horse—

Interviewer: It's a short trot from horse gamblers to stock traders.

[bell ringing]

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

Interviewer: Which is why so-called index funds— withholdings from an entire sector of a market— beat managed funds where experts pick and choose stocks.

John Bogle: In a given year, the index fund is likely to beat something like 65% of the comparably managed mutual funds. And over a decade, it's probably going to be 80%.

Interviewer: John Bogle ought to know. He's the legendary founder of the Vanguard Group.

John Bogle: And over an investment lifetime, the index fund— amazing as it may sound— is apt to beat about 90% to 95% of all active investors.

Interviewer: But wait a minute. What about the 1990s stock market bubble?

James Surowiecki: Crowds go wrong when diversity really breaks down. Crowds also break down when people start paying too much attention to what those around them are doing.

If we're trying to make a good decision or predict the future, the knowledge we need is buried in the heads of people who you would never think to ask.

Interviewer: Though these days, thanks to the internet, you can ask anyone anytime anywhere. NewsFutures is one of those internet sites where anybody can sign on and bet on just about everything— from the odds of an epidemic to the Super Bowl. People play for prizes and bragging rights. And corporations use the website's information to help market their goods. Emile Servan-Schreiber is the CEO.

And this is more than just sport and games? There's real information to be gathered from these markets.

Emile Servan-schreiber: Absolutely. It taps directly into the collective intelligence of the audience.

Interviewer: Robin Gordon plays NewsFutures. She's divorced and a mother of three and a part-time beautician.

Robin Gordon: It's a wonderful predictor. I would say probably nine times out of 10, the way it happens in real life is the way that it happens on NewsFutures. The players are very knowledgeable. There's a lot of people out there with a lot of internal smarts.

Interviewer: And talk about smart— Harvard Business School professor Anita Elberse not only trusts the wisdom of the masses, she helps market it to Hollywood.

Anita Elberse: So the Hollywood Stock Exchange is a game where people can bet on the success of movies. One movie that's coming out is "Glory Road" on January 13th, and currently the market thinks that this movie will do— the price is 35 Hollywood dollars, which means that the market expects that the movie will do about $35 million in the first four weeks of its release.

[music playing]

Interviewer: Right now, betting on the upcoming Oscars is big. Reese Witherspoon is in the lead for Best Actress— Heath Ledger for Best Actor, Brokeback Mountain for Best Picture. Last year, folks playing this site beat just about all the experts with a perfect eight out of eight in the top categories.

So there you have it. Experts often know less than they think. A group of amateurs— more than any one person knows. And people can be trusted. It's an old lesson that James Surowiecki is sharing anew— a lesson easily forgotten.

James Surowiecki: If you go back to Machiavelli and "The Prince," what does he say? He says, do not surround yourself with yes-men and that this is what the prince has to watch out for. But apparently, when it comes down to it, it's just very hard to follow that good advice.

Interviewer: Oh, and we almost forgot. The actual number of jelly beans in our jar was 1,369. The crowd's average guess was 1,247. No single guess was closer.