THE DECISION-MAKING ABILITY OF CROWDS VS. EXPERTS: A CASE STUDY

Ethan Mollick of the Wharton School of the University of Pennsylvania and Ramana Nanda of the Harvard Business School collaborated recently on a Working Paper captioned Wisdom or Madness? Comparing Crowds with Expert Evaluation in Funding the Arts. The full Working Paper, which I recommend for everyone in the Crowdfunding space, academic or otherwise, is available here.

Professors Mollick and Nanda seek to compare the decisions of crowds with the evaluations of experts in a rigorous academic study.

Using data supplied by Kickstarter, the authors focus on campaigns involving theatrical projects, which
involve both a highly subjective judgment about artistic merit and a predictive judgment about commercial success. On one hand, the data from Kickstarter indicate which projects were funded by the crowd. On the other hand, the authors obtained evaluations from a panel of industry experts, in this case recognized theater critics. The authors were then able to compare the judgments of the crowd to the evaluations of the industry experts.

The results were illuminating:

  • There was a very high correlation between the judgment of the crowd and the evaluations of the experts. In this respect the study seems to strongly confirm the ability of crowds to make good decisions.
  • Where the crowd and the experts disagreed, the crowd tended to be more positive than the experts, i.e., the crowd funded projects that the experts would not have funded. Moreover, those projects turned out to be no less successful than projects approved by the experts. As the authors put it, “Overall, our findings suggest that the democratization of entry that is facilitated by Crowdfunding has the potential to lower the incidence of ‘false negatives.’”
  • Projects funded by the crowd tended to share certain characteristics, suggesting that “there is an ‘art’ to raising money from crowds.” According to the authors, “The crowds seem to place emphasis on, or extract information content from different attributes of the process than experts.”

I find this fascinating and instructive. For one thing, the finding that industry experts tend to be overly negative correlates with my own experience in the world of law and venture funding. More important, the study suggests that in a world where access to capital is controlled by experts the likelihood is that good projects will go unfunded.

That insight has enormous implications for the capital formation industry and the world economy. If more worthwhile projects are funded, with the accompanying economic growth, that is a strong justification for Crowdfunding. And if crowds tend to avoid false negatives, then it makes sense for the U.S. to adopt a robust Title III as soon as possible.

I want to thank Professors Mollick and Nanda for making me aware of this study and for their continuing work in this space. As this study illustrates, the academic world has important lessons for portals, lawyers, legislators, investors, and everyone else in Crowdfunding.

Questions? Contact Mark Roderick.

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2 thoughts on “THE DECISION-MAKING ABILITY OF CROWDS VS. EXPERTS: A CASE STUDY

  1. […] paper by Ethan Mollick and Ramana Nanda, which came out in late June; we first read about the study on Mark Roderick’s blog. In it, the two authors examine the viability of crowd wisdom, as it relates specifically to […]

  2. iFunding (@inno_funding) August 18, 2014 at 6:14 pm Reply

    An August NY Times blog post reinforces your view, Mark, on crowds’ decision-making skill. http://bits.blogs.nytimes.com/2014/08/15/crowdfunding-and-venture-funding-more-alike-than-you-think/ – Scott Lichtman @ iFunding

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