Minyan Mailbag: Is the Internet Causing Group Think?
The type of herding behavior that crowds engage in has happened throughout time...
Please address the following in one of your columns if you feel it is appropriate/interesting to others.
In James Surowiecki's The Wisdom of Crowds, he argues that the masses are generally right given several conditions, one of which is that each participant in the crowd generates his/her opinion independently of others. You've remarked a couple of times that you sense that despite the thousands of funds/millions of participants, everyone is moving to the same side of the trade (whether long volatility, short dollar, etc.).
Do you think that with the internet (blogs, Minyanville, other media sources, etc), fund managers/professionals are reading the same set of bull/bear opinions and that this is leading to "group-think" for both sides? I ask because I think that the break of the recent trading range, its velocity and the reasons that cause it will startle bulls and bears.
It matters not what the actual method of information dissemination is. It could be TV, Internet, print or word of mouth. The type of herding behavior that crowds engage in has happened throughout time (Remember 1929? How about 1987 when information was even more "free flowing"?), suggesting technological innovations have little/no impact on the tendency or frequency to herd (to buy high and sell low). The point is that structural issues like the manner in which information is transmitted, is entirely moot. The important thing is to understand that people herd more or less irrespective of the manner in which they pick up 'signals' from others to buy or sell or do nothing. We often denigrate the limbic system when we talk about human tendencies to herd. But in reality the limbic system is far more complex than we currently understand.
Understand too that it doesn't matter if a trading range (intraday, daily, weekly or monthly) breaks because of endogenous reasons like supply and demand or exogenous reasons (like a terrorist attack or some other external catalyst). Markets are either ripe for a bifurcation or they are not; the actual cause is relatively unimportant (and impossible to predict anyway). What we should try to do is determine when those conditions are most ripe for a bifurcation and not "what" might trigger it.
Hope that helps…
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