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spCommonplace knowledge suggests that decision-making is something that we do as individuals, and that some people are just better than others at consistently making good decisions.

Yet, author and Director of MIT’s Human Dynamics Laboratory and the MIT Media Lab Enterpreneurship Program, Sandy Pentland, challenges the assumption by saying that people who are engaged with social networks make better decisions. “Social interaction is where the power of good decisions comes from.”

Pentland has been recently featured in an Harvard Business Review webinar, How Social Influence Does (and Doesn’t) Affect Decision Making, where he discussed the key points of his new book, Social Physics: How Good Spread – the Lessons from a New Science.

Social bonding guide a community

The author started his presentation by citing Adam Smith, who as early as the 18th century noted:

“It is human nature to exchange not only goods but also ideas, assistance and favours out of sympathy. It is this exchange that guides men to create solutions for the good of the community.”

Pentland emphasised that it is the social bonding between people that guide a community to make better decisions and the people in the community to make individually good decisions.

“This is human nature”, he stressed, and “social networks allow the phenomenon to amplify.”

He gave the example of eToro, a twitter-like social network where members buy and sell euros, dollars, gold and silver. It is an online trading community.

On eToro, everyone can see what everyone else is buying and selling, and copy them. “This is a site where very dedicated traders who move significant amount of money try to learn from each other.” Based on idea flow, Pentland identified three groups:

  • Isolated. “These members thought that they could do best by just going alone”. They traded based solely on their knowledge and intuition.
  • Bubble. These users were very social, and copied the activity of many different traders.
  • People with a medium amount of social interactions. They reached out by looking at the different types of things going on. This group tended to copy what other people did when times were uncertain, while they did less copy when the market trends were pretty clear. “They substituted social learning from other people for the weakness in personal information that they had.”

Isolated people, performed no better or worse that the overall market. Bubble did a little better than the isolated but still were not the best “because of the loops that their crazy copying created.” One of the problems with bubble was that the same ideas were going around multiple times, creating an echo chamber-like effect. People with a medium amount of social interactions – who constantly accessed new ideas – ended up with making 30% more money of the people who went alone.

“One of the main take aways here,” commented Pentland “is that if you are listening to different ideas, seeking out new information all the time, and getting updated knowledge regularly, you can make much better decisions than the brave people who try to go alone or the people who go only with the crowd.”

Engagement and exploration

While eToro is an external social network for finance people the same principle apply inside the enterprise. In fact, the author identified two important communication patterns associated with idea flow and harvesting ideas from a diverse set of people, demonstrating the subsequent effect of increased productivity:

Engagement. This is the density of sharing information within a work group which “allows everyone in a group to be on the same page. This is an important part of good decision making. Here is where you need to have everyone talking to each other.” Even in the most standard situations involving decision making, Pentland found that engagement accounted for 30% of variation in productivity. “What it means is that the decisions of the workers are 30% more profitable for the company when they interact with all the people in their work group. The ability to make good decisions quickly has to do with this social engagement.”

Exploration. This was defined by Pentland as harvesting new ideas outside one’s group.

“Exploration outside the work group – interactions with management, support personnel, sales people, etc. – accounted for another 10% of variations in productivity.

“Harvesting ideas around you and different perspectives, is a major factor in making good decisions. It is not about special individuals who are smarter than everybody else. Those who appears as the smartest are the ones who better harvest different perspectives.”

When people share ideas and learning through their company’s social networks the quality of decision-making inside the organisation can be dramatically improved.

Watch out for bubbles

Within the process, Pentland recommended to “watch out for bubbles”. As with the eToro bubble traders who ended up with using the same information and ideas over and over, organisations can suffer from information flow becoming stagnant. To prevent this, it is important to pay attention to how employees get information and ensure that fresh ideas are constantly in the mix.

Also, “ensure that decision making groups are diverse.” In this context, diversity means a group with a variety of viewpoints that represents different stakeholders and inputs.

“Getting people with a diversity in strategies, diversity in source of information, different viewpoints is key to good decision making.”