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Yet another weird SF fan
 

Tuesday, March 11, 2008

Groupthink, Market Bubbles, and Exponential Modes

Robin Hanson recently demonstrated how much a contrarian he can be. In a society devoted to individualism, he came out in favor of conformity:

This is a concrete occasion to revisit a general issue.  In general, if you want to believe the truth, then you should just accept the average belief on any topic unless you have a good (and better than average) reason to think the causes of your belief difference would be substantially more informed than average.

My first reaction was that if he takes that theory seriously, he should reject it.

On the other hand, although people in our society claim to be individualists, investor behavior during market bubbles show how easily the same people can move their opinions towards the average. Speculative bubbles are a classic counterexample to “the majority is reliable.” It can be financially dangerous to move your opinion on the price of an investment towards majority opinion during a bubble.

On the gripping hand, if you reject anything that looks like a speculative bubble out of hand, you might miss the next exponential mode (another Robin Hanson theory).

These apparently “odd” opinions fit together…

3 Comments:

Blogger Robin Hanson said...

If you accept the average belief in finance you just accept the returns of an index fund without trying to beat the market. This strategy won't hurt you much during a bubble.

5:25 AM  
Blogger Dave said...

I agree with Robin Hanson's comment. Bubbles are big news at the moment, but they don't refute the general idea.
People love to denigrate humans as being sheeplike, but it's not so. We do have crowd instincts, but we are much, much smarter than sheep. If you had to follow a herd of sheep or a herd of humans, which would you pick?

8:05 AM  
Blogger Joseph said...

It might make sense to follow a herd of cats ... except then we'd start thinking that dogs are monsters and mice are toys.

1:46 AM  

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