The little known “Zollman Effect” runs counter to the widely accepted notion of "the wisdom of crowds." In a nutshell, it notes that there are often occasions (not least in the absence of insiders) when it is actually not beneficial for large groups of people to come together and to communicate with each other as regards making predictions about future outcomes. When there are no insiders (and therefore little to no hope of any price discovery process taking place - think political betting markets) large network connection groups typically display significant collective cognitive and social biases and they often succumb to motivated reasoning and a conformity bias, tending to coalesece quickly around a dominant prevailing narrative: in the process often refusing to entertain alternative counter-factual arguments,
to the point of even being unwilling to pass on good information to each other that goes against the collective grain. (Bitcoin/Wallstreetbets).
People in these groups shed their individual perspective/outlook and this gives rise to a collective "unconsciousness" and a situation whereby each individual's behaviour becomes governed by the "group mind".
A worrying aspect of these group networks, is the degree and extent to which they can become influenced and manipulated by "pernicious influencers" - often leading media or industry figures - who, under the guise of offering up useful information, actually muddy the water, by simply passing on noise as though it were actually meaningfull and thereby preventing the group from reaching a proper consensus based on the available evidence (think Mark Cuban/Elon Musk chatter over GameStop and Bitcoin etc). At a more sinsiter level, you have characters on social media, who quickly build up large followings on the back of bombastic boasts that they have placed significantly large trades in bombed out penny stocks.
Whilst group consensus is difficult to shift, it is not immune to being shaken up in a rather dramatic fashion, such as where an individual pops up out of nowhere and takes a large position against the crowd's prevailing narrative - such as for example, when somebody spots that it is time to take profits in Tilray because the retail crowd have gotten carried away with themselves.).
or when, out of the blue, a major sell program upends the popular trade in heavily shorted biotech stocks. Things unravel very quickly.
Investors in Tilray Suffer a Whitey.
Looking ahead - we are keeping a very close eye on both Saddle Ranch Media and KYN Capital Group - social media darlings - to see when and how the recent dramatic rally in their share prices will finally be upended.
In nuce, Zollman argues that highly connected networks that do not contain true price discovery mechanisms quickly converge to uniform beliefs that are actually riddled with noise and held in place by chatter, whilst more sparse networks, in which each of the participants interrogate the evidence on their own terms and share their findings with each other (even when contradictory) have a better chance at filtering out the noise and accordingly getting closer to the underlying truth - think about the case of Nate Silver and 538
and political betting markets.
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