Wisdom or Madness? Comparing Crowds with Expert Evaluation in Funding the Arts by SSRN
University of Pennsylvania – Wharton School
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Harvard University – Entrepreneurial Management Unit
December 16, 2014
Management Science, Forthcoming
In fields as diverse as technology entrepreneurship and the arts, crowds of interested stakeholders are increasingly responsible for deciding which innovations to fund, a privilege that was previously reserved for a few experts, such as venture capitalists and grant?making bodies. Little is known about the degree to which the crowd differs from experts in judging which ideas to fund, and, indeed, whether the crowd is even rational in making funding decisions. Drawing on a panel of national experts and comprehensive data from the largest crowdfunding site, we examine funding decisions for proposed theater projects, a category where expert and crowd preferences might be expected to differ greatly. We instead find substantial agreement between the funding decisions of crowds and experts. Where crowds and experts disagree, it is far more likely to be a case where the crowd is willing to fund projects that experts may not. Examining the outcomes of these projects, we find no quantitative or qualitative differences between projects funded by the crowd alone, and those that were selected by both the crowd and experts. Our findings suggest that crowdfunding can play an important role in complementing expert decisions, particularly in sectors where the crowds are end users, by allowing projects the option to receive multiple evaluations and thereby lowering the incidence of “false negatives.”
Wisdom Or Madness? Comparing Crowds With Expert Evaluation In Funding The Arts – Introduction
One of the central insights of Schumpeter (1942) was to highlight the distinct roles played by entrepreneurs and investors in bringing new ideas to fruition, since it allowed for the possibility that good ideas might be precluded from the market because they were unable to attract financing from investors. Other scholars have shown that the opinions of funding authorities similarly affect the direction of innovation in other critical fields, including scientific research (Bourdieu, 1975; Goldfarb, 2008; Nelson, 1959) and creative industries (Caves, 2000, 2003). In each setting, scholars have noted that constrained financing environments and the control exerted by a small group of experts means that projects that are ultimately funded are not necessarily “objectively best” but are subject to the specific information, agency, and organizational constraints faced by the small number of experts making funding decisions. (e.g. Caves, 2000; Ferrary & Granovetter, 2009; Goldfarb, 2008; Kerr, Nanda, & Rhodes?Kropf, 2013; Kortum & Lerner, 2000).
Rapid technological advances over the past few years have made it significantly easier for innovators to circumvent experts, and instead communicate directly with a large number of interested stakeholders, leading to the growing reliance on “crowds” to make decisions that once rested solely in the hands of a small number experts. For example, the crowdfunding platform Kickstarter has raised more than $1 billion for over 60,000 projects from over six million backers since its founding in 2009, projects that may otherwise have needed to seek funding from venture investors or grant?making bodies. In fact, since 2012, this platform alone raises more money for the arts annually than the total funding provided through the US government?run National Endowment for the Arts. The importance of crowd?based decisions are growing in a wide range of fields, including the funding of technology?based startups (Agrawal, Catalini, & Goldfarb, 2013; Mollick, 2014), the development of new products (Afuah & Tucci, 2012; Poetz & Schreier, 2012; Von Hippel, 1986) and scientific research (Franzoni & Sauermann, 2014).
Despite the growing role of crowds in making decisions once left to experts, little is known about how crowds and experts may differ in their ability to judge projects. Indeed, for crowds, at least, there is even considerable debate over whether their decisions are actually based on rational criteria at all. Two popular books separated by 150 years offer starkly different views of the nature of crowd decisionmaking, with Charles Mackay (1852) warning about the “madness of crowds” while James Surowiecki (2004) more recently extolled the “wisdom of crowds.” Studies to date attempting to understand the differences between crowds and experts have focused on prediction tasks or markets, where aggregated decisions can be more accurate than individual actions (Budescu & Chen, 2014; Larrick, Mannes, & Soll, 2012; Ray, 2006; Tetlock, 2005), or else on cases where organizations can get positive results by reaching out to crowds under carefully controlled circumstances (Bogers, Afuah, & Bastian, 2010; Terwiesch & Ulrich, 2009).
What Is Art? Surprisingly, The Crowdfunders And Experts Agree
Crowds are smarter than one might think. A Wharton research paper discovered that the artistic tastes of the masses are remarkably aligned with those of experts.
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