Federal Open Market Committee

The Federal Open Market Committee (FOMC) is the twelve-member body that sets interest rates, comprising the seven members of the Federal Reserve Board and five presidents of regional Federal Reserve banks. In the book, it serves both as a real-world example of committee decision-making and as the model for experiments testing whether groups can recognize changing economic conditions faster and more accurately than individuals. Its significance lies in the tension between a committee’s potential to pool knowledge and the organizational habits that can silence disagreement or leave relevant information unshared.

Role and Structure

The committee’s interest-rate decisions make it a consequential instance of collective judgment. In the mid-1990s, Alan S. Blinder served as vice chairman of the Federal Reserve Board, and that experience left him deeply skeptical of decision-making by committee. The FOMC’s twelve members offered a concrete setting for examining the familiar objection that committees are inefficient: can a group make an intelligent decision without taking too long?

Blinder and John Morgan designed two experiments to approximate the challenges facing the FOMC. In the first, participants watched draws from urns initially containing equal numbers of red and blue balls. After the first ten draws, the proportions shifted so that one color made up 70 percent and the other 30 percent. Participants had to identify the newly prevalent color as soon as possible; each draw made after the changeover brought a penalty. The task represented the problem of detecting changed economic conditions and deciding whether monetary policy should shift.

Committee Decision Experiments

Participants first played the urn game alone, then in groups with free discussion, then alone again, and finally once more as groups. The sequence was designed to control for learning. The group decisions were both faster and more accurate: groups identified the direction of the change correctly 89 percent of the time, compared with 84 percent for individuals, and even surpassed the best individual. The experiment therefore challenged the assumption that a committee must trade accuracy for speed.

A second experiment used a different urn-based task to test how groups aggregate information. Participants drew marbles in sequence from one of two urns: one contained twice as many light as dark marbles, while the other contained twice as many dark as light marbles. Each person privately saw the color drawn but announced only a guess about which urn was in use. When participants were paid for their own correct answer, choices often followed earlier guesses rather than private evidence; information cascades began in 78 percent of trials.

Hung and Plott changed the incentive: students were paid according to whether the group’s majority answer was correct. This encouraged them to attend more to their own imperfect private information and less to the guesses already announced. Individuals could become less likely to guess correctly on their own, yet the group became significantly more accurate than the cascading groups. The result underscored a central condition for collective judgment: members must retain enough independence for diverse information to enter the group’s answer.

Information, Autonomy, and Organizational Limits

The experiments support a broader distinction between merely convening a committee and creating a process that can use what its members know. In the book’s account of the U.S. intelligence community before September 11, specialization across agencies could produce expertise and diverse perspectives, but the agencies lacked a genuine mechanism for aggregating judgments. Information remained fragmented, and the argument for a single central authority risked sacrificing the local knowledge, independence, and diversity that decentralization makes possible. The proposed alternative was aggregation without simply replacing specialized agencies with a top-down center.

The FOMC is thus an example of collective decision-making whose promise depends on how discussion is organized. Groups can draw on more information than any member possesses, but that advantage is not automatic: sequential influence can suppress private evidence, while a poorly run discussion can narrow the range of analysis considered. The book’s experiments make the committee’s practical lesson precise: collective intelligence requires both access to varied knowledge and a process that lets it count.