Pete Cashmore, Paul Montgomery , and Mitch Ratcliff are having a real good conversation regarding the collective intelligence of “humanity” versus “algorithms.” A few random thoughts . . . as I dont have too much time for “coherentness”

1. Reminds me of the debate in the financial industry on quant hedge funds (program based trading) versus investing in broad indexes such as the S&P 500 (ie algorithms vs. collective intelligence). (BTW the third option, investing in human managed funds, would be considered the web 1.0 model . . . stupid, slow, dumb . . . I’m exagerating but you get my point.) The problem with algorithms (in both finance and editorial content) is that it is based on a priori model of the world which assumes that certain unknown variables (not in the model) remains constant. So as long as major shocks to the system do not appear (such as major earning disappointment, corporate fraud etc) , algorithms are much much faster than humans can at detecting market efficiencies, forming a view on market movements, and capturing value by exploiting such an inefficiencies. These models will make money slowly but consistantly until something goes wrong and the fund could potentially lose everything (read Long-Term Capital). As such, most quant hedge funds built into the system ways to for humans to intervene (such as turning off the trading program during earnings week or triple witching hour) as well as ways to add value into the model. The co-dependency implementation is not perfect but it beats losing your shirt. Perhaps thats where we are headed on the web in the not too distant future.

2. This is another key difference between Yahoo and Google. Many people have pointed this out before. Essentially Yahoo’s historic background in directories and Google’s in algorithms has pited the two company in two of major camps in their vision of the future. Yahoo has fully embraced the whole web 2.0 peer economy model. MyWeb is a historic attempt at “PeerRank” while many of its other products like Yahoo Local relies on the contribution of users. Google on the other hand is still taking an aggregated approach to web 2.0. Essentially it is gathering up reviews and content contributed by users of OTHER websites and presenting it to its users. Google believes that it has superior parsing and ranking algorithm to recognize valuable content and create “semantics” around unstructured data. Look at the relaunch of Froogle and its vendor and product reviews. . . all crawled from other content providers. Both model has its merits . . . Google has a much easier time building critical mass and generating value for its OWN users in the early phase of the product lifecycle. . . but eventually, it is at the whims of content providers (see craigslist and oodle). Yahoo, on the other hand will have a much harder time generating network effects, but once it does, its position in the industry is much more defensible because it “owns” much of the content on its own site. I wonder who will win out in the future . . .