Harvard Business School: CrowdWisdom or CrowdMadness?

Herd of Sheep Stampede

This study, authored by Ethan Mollick of Wharton and Ramana Nanda of Harvard Business School, has recently been making the rounds.  Entitled; Wisdom or Madness? Comparing Crowds with Expert Evaluation in Funding the Arts, the polemic addresses the question of crowdwisdom or herd mentality.  This has been a common discussion within the crowdfunding world something both academics and industry participants have frequently discussed.  Most industry types can readily share examples of both situations where mob mentality can drive a herd off the cliff of demise, or situations where the efforts of many are clearly beneficial for the collective good.

The Mollick / Nanda research, in brief, has come to the conclusion that “findings suggest that the democratization of entry that is facilitated by the crowdfunding has the potential to lower the incidence of “false negatives,” by allowing projects the option to receive multiple evaluations and reach out to receptive communities that may not otherwise be represented by experts”.  So the two academicians are validating the benefit of the crowd. This is similar to data shared by noted crowdfunding authority and research Dr. Richard Swart – who earlier this year shared a presentation on this very subject.

Global banking company Deutsche Bank has also tackled the topic in their published report; Does crowd euphoria impair risk consciousness?  While the team at Deutsche Bank is less conclusive they embrace the approach of crowdfunding as whole.

Mollick / Nanda claim to be the first detailed comparison of crowd judgement vs. expert prognostication.  A subject of growing relevance in our ever connected world. Their net analysis states that, at a minimum the crowd is as good as those claiming the mantle of expert.

“We find that the crowd is more wise than mad, generally agreeing with the experts, and that, on average, the projects selected by the crowd alone seem to do as well as those selected by experts. For academics, our work highlights the need to better understand the ways in which crowd decisions are made and the circumstances under which the crowd, experts, or a combination should be deployed to address particular needs. Practically, this paper suggests that crowdfunding may be a viable source of entrepreneurial financing, for both cultural projects and traditional startups. The crowd has the potential to increase innovation, lower barriers to entry, and democratize the entrepreneurial process by allowing more ideas to compete in the marketplace.”

You may click here to download or view the complete study is embedded below.

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