Recently we’ve talked about the “wisdom of the crowds” in information cascades. In particular, how two consumers’ decision to choose to go to restaurant A instead of B may cause all subsequent consumers to make the same choice. This scenario embodies this notion that herds of people might make a better choice than a single person. Of course this idea isn’t new, after all a democracy is a type of government based on this principle and there are plenty who argue the decisions made now or historically aren’t wise at all. Crowdsourcing is a term coined by Jeff Howe that describes this notion, and is defined as

“the act of a company or institution taking a function once performed by employees and outsourcing it to an undefined (and generally large) network of people in the form of an open call.”

Catone’s blog article Crowdsourcing: A Million Heads is Better than One analyzes this new phenomenon and comments on its advantages and disadvantages.

Catone claims crowdsourcing takes three forms: 1) creation, 2) prediction, and 3) organization. Creation refers to designing new or modifying existing products based on the opinions of the people in the network, which usually is the World Wide Web. Two examples of creation are Cambrian house and Crowd Spirit. Prediction refers to using the crowd’s knowledge to make investments. One example is Marketocracy, which created a mutual fund called the Masters 100 Index based on the virtual investments of its top 100 most successful members. Now the fund is worth $44 million and has beat S&P 500 Index, which is considered a good gauge of the U.S. equities market. Organization refers to using the crowd to classify articles, photos, web pages, and etc. by interest and relevance. digg is an excellent example organizing news, videos, and podcasts by the interests of the crowds

Catone concludes his post noting that crowds are susceptible to “mania” (i.e. popularity may promote a terrible idea). Catone believes to use crowdsourcing effectively, first there ought to be constraints. Second, a “core group” makes the final decisions on what products the company will manufacture or investments to make. Third, contributors should try to avoid following the crowd in order to produce the best product. Finally, crowds are better voters than inventors (i.e. parts of a product ought to be created by individuals to promote creativity, but the design that goes in the final product ought to be decided by vote). To find out more articles about crowdsourcing you can check this blog that is devoted to it.