The concept is basic. A prediction made by aggregating the opinions of a large group will be more accurate than the prediction made by any one member of that group. A guy named James Surowiecki wrote a book about this concept- you can read about it here: http://tinyurl.com/mbmnb.
I think about this concept frequently when I’m waiting for the subway in the morning. Coming from Williamsburg I take the L train into Manhattan and transfer to the NQRW line uptown to my office at 33rd Street. When waiting on the NQRW platform the Local trains run on the right side of the platform and the express trains run on the left side. The express train is faster, but only by a few minutes, so if the local train pulls up before the express train this prediction has to be made: Do you think an express train is going to arrive in the next 3 minutes? When this dilemma arises there are usually 100-300 people waiting on the platform contemplating the same question. I make my decision based on the wisdom of the crowd. By watching what everyone else does I can leverage the collective knowledge of the group (for instance maybe they can see a train coming by peering down the tunnel, or maybe they’ve been waiting there for 10 minutes already and know that an express train will surely be coming soon) to ensure the quickest route to work.
This concept works very easily on a subway platform where you can observe everyone’s actions first hand, but it can be harder to implement on a larger scale (e.g. for decisions that actually matter…). One side effect of social networking technology is that it empowers individuals to share their ideas (and collective wisdom) publicly with a large audience. By monitoring the social chatter, businesses and marketers can make informed decisions leveraging the wisdom of an enormous crowd. It’s as if everyone in the social networking community is standing on the same subway platform.
There is, of course, the potential for getting incorrect cues from the social web. Some thought should be given to whether or not the social networking community is a representative sample of your desired audience (I would suspect to rarely be the case). Also, just like on the subway platform, the people who are making the most noise are either trying to make money or are completely insane.