“Under the right circumstances, groups are remarkably intelligent, and are often smarter than the smartest person in them.”James Surowiecki · The Wisdom of Crowds · 2004 · Introduction, 'The Wisdom of Crowds'
A diverse and independent crowd can be wiser than its smartest member.
Surowiecki shows that crowds can make good decisions when each member uses their own information, without being influenced by others. For example, in a famous experiment, people estimated the weight of an ox; the average of individual estimates was nearly perfect, though no one guessed exactly. Conversely, when people copy each other's opinions, the group can reach poor conclusions, as happens in speculative bubbles. A financial market works well when participants have diverse information and act independently. When everyone follows the same signal or the same leader, the risk of collective error arises.
Why it matters The reader's question 'Why do speculative bubbles repeat?' finds an answer here: bubbles occur when independence of judgment is lost, and the crowd becomes a herd, exactly as this week's volatility spikes show.