Reading: Chapters 5-8 Wisdom of Crowds by James Surowiecki
Describe the difference between a coordination problem and a cognition problem.
Give an example of a coordination problem that you have experienced that was not used in the book. Come up with something where some non-trivial decisions were needed (i.e. avoid – everyone needs to find a chair in a room).
How do norms and conventions help us solve large-scale coordination problems?
Give a clever example of a cooperation problem – where the participants needed to avoid pure self-interest to achieve the greater good. How did the participants know to make the right decisions?
Describe the experiment with the Capuchin monkeys and its conclusion. What does its outcome potentially tell us about ourselves?
Often capitalism is described as being “heartless” and “every one for themselves”. Describe how in some ways, honesty, trust, and considering the long-term impact of choices is seen by some as an essential underpinning of successful capitalism.
Why is the “Good Housekeeping Seal of Approval” valuable? Have you ever used the seal to get your money back? Why not?
In the Fehr / Cachter experiment there are generally three types of people when it comes to their approach to free-rider problems. Describe the three types and the approximate number of each type we might find out of 100 people.
When the free rider experiment is run many times, on average what percentage of people are free riding at the beginning of the experiment and what percentage of people are free riding at the end of the experiment?
Define “Strong Reciprocity”. Give an example in your live where you have seen strong reciprocity and an example where you have not seen strong reciprocity.
I also include my rough reading notes from the Chapters below:

Chapter 5
Street Life Project (84)
Coordination Problems (85)
– Take into account what others are doing
El Farol (86)
– Computer Simulation – Urrg
Meet in NYC with no pre-communication (90)
– New Haven Conneticut – Hmmm.
– Schelling Points (91)
Smart Technologies – Group coordination (92)
– Smart Mobs – Howard Rheingold
– Front stairs and back stairs (93)
Subway Seats – Stanley Milgram (94)
– Half the people
– Norms – Usually you don’t have to defend
– Line Jumping – Fear of disruption (96)
Pricing (98)
– Airlines / Walmart – AA 500K prices changes per day
– Movie theaters – why a fixed price?
Bird flocks (101)
– Bottom up – simple rules – overall goal – effective
– Fredriech Hayek – “spontaneous order”
– Cars on a freeway – Zipper
Orange Juice (102)
– Tokyo umbrellas
Buyer / Seller – Vernon Smith (102)
– Students know only the prices on their cards
– Markets work when there is limited information
– EBay stories
Chapter 6
Cooperation Problems (110)
– Take into account what others are doing
– Needs a broader definition of self-interest
– Also must trust that the system is fair
Italian Soccer Story (107)
– Focus on the refs – not the game
– Honesty does not pay – you get pushed into dishonesty
RIchard Garasso – CEO NYSE (111)
– We are pretty programmed to get livid when we see unfairness
Ultimatum Game (112)
– Person 1 picks split – person 2 decides on the win
Capuchin Monkeys (113)
– Pebble – Cucumber – Grape
– Fairness is programmed in – deeply – necessary for groups
– Ultimatum game when one is “special” (114)
Strong Reciprocity (116)
– Prosocial behavior
– Not altruists – not thinking about the greater good
– Just punishing anti-social behavior in the small
– Produces positive results on the whole
Shadow of the Future – Robert Axlerod (117)
– Repeated interactions between pairs of people
– Not sufficient to explain it “all”
– Tipping in a city you seldom visit
– We have learned about and innately understand the good of the many
– What goes around comes around
Quakers (119)
– Trust and a reputation for fairness – is value
– It pays to be honest (or so it seems)
Trader Rules (121)
– Embargo when a city did not protect a member of the guild
– Punish rule breakers internally – to keep reputation of a group from being harmed
– Credit reports
Brands
– Underwriters Labs / Better Business Bureau / Good Housekeeping
http://www.goodhousekeeping.com/product-testing/seal-holders/about-good-housekeeping-seal
http://en.wikipedia.org/wiki/Good_Housekeeping
Assumed Trust Fabric (124)
– CD Example
– High trust societies are more efficient – less protection needed
Studies in Small/Isolated Societies (125)
– Foraging, consume (slash/burn), nomadic herders, small agricultural
– None were “purely rational”
– Different directions of deviation
– The more market oriented – the more we see “strong reciprocity”
Stock Market (126)
– No Shadow of the future – things were just getting better – even for bad businesses
– Auditors became part of the problem – There was never a consequence – rubber stamp
Neilson Ratings (128)
– 5000 boxes
– Sweeps week 2.5 million diaries – stunt programming – everyone is “dishonest”
– Very imperfect but no one wants to fix it – “good enough?”
– Sometimes a new solution is needed – Digital Cable
Free RIders (133)
– People contribute to the common good
– Businesses may not – investors force focus on pure self-interest
Guardian Bank and Trust (135)
Paying Taxes (137)
– Non excludable good
– Audit 1 in 200 returns
– Tax compliance in the US is high – folks willing to pay their share as long as it is pretty equal – reciprocity
– No one wants to be a sucker
Free RIder Experiment (139)
– Ernst Fehr and Simon Gachter
– 20 tokens / 4 rounds / 0.4 return for each token in the pot
– Best group strategy – invest all your tokens all the time
– Best individual strategy – Invest no tokens
– When you see free riding happening you change your pattern
– By the end 70-80 percent are free riding
– 25% selfish – 10% altruists – 65% conditional consenters
– The conditional consenters are what matter – the system works if they believe
Game 2 (140)
– Bids are public
– You could spend 1/3 token to hammer anyone else
– Things worked well
“A huge part of the IRS mission is making sure people believe the system works.” – Matt Matthews
Chapter 7 – Traffic
London Downtown (146)
– Determine the economic cost and levy a fee so people make the right choice based on the real value – including the group value
– Pay permit to go and get fined if you don’t pay and get caught
– Nights and weekends on phones – long distance on cell calls
– Singapore – auto-pay with feedback – let drivers decide
– Need to invest the revenue in transit – adjust supply side as well
Highway (150)
– Cars are like birds
– Leave the front slower than approach the rear – jams move backward on the highway
– Spontaneous jams
– In car assistance
– On-ramp stoplights
– Smart roads and smart cars
– PATH Project – http://www.path.berkeley.edu/PATH/Publications/Videos/
– Zipper
Chapter 8 – Science
SARS Event (158)
– Information flowed around the world and was shared – led to quick identification
– Who was the hero? The crowd.
– Many simultaneous activities – eliminating viruses that it was not – to find the common factor
– Virus identified within a month
– No one in charge
Top Quark – 450 Physicists
Talk about CERN
– All know that they won’t get the Nobel prize alone
– Diverse contributions – diverse talents
– Fun is part of it – it is a scociety – you join – there are benefits
– It created the world wide web