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The Danger of Groupthink

The Danger of Groupthink

Leading up to the November elections nervous investors uttered variants of, “Everyone is saying the markets are gonna fall if Trump is elected.” Apollo’s view was usually a variant of, “Really? Who is this ‘everyone’ and why should we listen to them?”

In hindsight the ‘Trump Bump’ has returned 11.6% to the S&P 500 companies through Friday’s market close. Coincidence? Causal? We’re not sure that matters.

The worrisome aspect is the reliance upon groupthink. Just because something is popular…

As Nate Silver of FiveThirtyEight.com wrote:

Once a consensus view is established, it tends to reinforce itself until and unless there’s very compelling evidence for the contrary position. Social media, especially Twitter, can amplify the groupthink further…

…a position that seems to have deep backing from the evidence may really just be a reflection from the echo chamber. You should be looking toward how much evidence there is for a particular position as opposed to how many people hold that position: Having 20 independent pieces of evidence that mostly point in the same direction might indeed reflect a powerful consensus, while having 20 like-minded people citing the same warmed-over evidence is much less powerful.

FOMO is powerful. No doubt about it. But to make decisions based upon a consensus of nameless, faceless ‘experts’ just to avoid feeling like the only person who did/didn’t act? Surely there are more logical justifications for making investment (or any type of) decisions.

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