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Crowdfunding: Nobody guesses right, but everyone get it right!

10 | 04 | 2015
Crowdfunding: Nobody guesses right, but altogether get it right!

Heightened levels of individualisation characterise contemporary society. Along these lines, important for society decisions are being undertaken by each field’s experts, while the opinion of the crowd often remains unaccounted for.

It is not here intended to evaluate this societal development, which undoubtedly has both positive and negative dimensions. Instead, the focus is to show that collective decisions can sometimes be of greater efficiency than the ones stemming from a small body of like-minded people. By implication, newly-created businesses that have been established using Crowdfunding initiatives following their failure to secure funding from banks, namely the ‘experts’ of money lending, are not less efficient than the ones that managed to do so. The crowd knows best, in a collective manner, which ideas should be funded and, by extension, actualised.

It has been widely accepted that cognitive limitations surround individual acting. More specifically, information cascades that nudge individuals to imitation are often present in the lending sector, as individuals often base their decision on the prevailing market knowledge and often do not rely on their own judgments. Undoubtedly, intelligent imitation can allow for a plurality of positive externalities to arise. However, this occurs at the risk of mindless imitation, and by extension, at the risk of introducing serious negative externalities to society. Therefore, allowing the participation of independent individuals in the process of decision-making, in a way that decentralises it, ensures a reduced probability of market failure.

Normative preconceptions associated with culture also pose barriers to efficient decision-making. Cultural norms dictate the way in which individuals evaluate respective circumstances. Therefore, in cases where individuals from diverse cultural backgrounds participate in decision-making, the result is more efficient as this does not reflect each culture’s respective preconceptions.

It is evident that Crowdfunded businesses are a result of a decision-making process that is both of an independent and diverse nature: individuals that fund the respective projects undertake the decision independently, while the fact that this occurs via online platforms guarantees that these actors are not geographically, and by extension culturally nested. This implies that Crowdfunded products are highly valued from society’s point of view.

The Code: The Wisdom of the Crowd

Professor Marcus du Sautoy performed an experiment to empirically test that extent to which the aforementioned approach to decision-making finely illustrates reality. To this end, he put 4,510 jelly beans in a jar. In turn, he asked 160 people to visually estimate the number of jelly beans present in the jar. It is more than worth it to watch the result

 

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