Behavioral finance FAQ / Glossary (Group)
This is a separate page of the G-H section of the Glossary
Dates of related message(s) in the
Behavioral-Finance group (*):
Year/month, d: developed / discussed,
00/12i - 03/7i + see groupthink,
genetic utility, herding, conformity,
trend following + bfdef2
Sticking with friends, even down the cliff.
Groups influence not only thoughts but also actions.
Like for groupthink (see below), that impacts people opinions / judgments,
individual behaviors also are affected by the group(s) to which those people
belong or are related.
Group members tend to imitate one another.
Conformity is pervasive. The group not only tries to control our
neurons but also our hands and feet.
Is it OK?
There are some good motives to conform to what the group tells and does,
if only to keep the group unity and strength when facing the outside
If we do not live in isolation it is because our survival as human
beings was based on cooperating with others, and on following some
This is a matter of human evolution (found in other species too)
But this loyalty and convergence of statements and actions is acceptable
only within reasonable limits.
Common mistakes are not better, or are even worse, than individual
One particular danger is that in a group, people may lose their
individual inhibitions (or hide their individual reservations) and adopt
a common behavior even if it becomes excessive or irrational. As seen
in the groupthink article, there can be an escalation towards radical /
Group behavior in markets
Following the market crowd.
In markets, people might act, in various cases, not as independent beings,
but under the influence of the other players.
This is found in bandwagon effects, trend following, information cascade...
(see those words)
That behavior might make prices deviate from estimates that would be
based on an independent and rational rewards / risks analysis.
Well, some might say that behaving like the crowd also has, to some
extent, its rationality
Some agent-based models (see that phrases) use "behavioral"
algorithms (see mathematical psychology). Those robots are supposed
to decrypt how participants in the "investing community" are interacting,
predict their next moves and the consequences on prices.
There is some uncertainty here, as in real life, people reactions can
stray from the model.
00/12i - 01/1i - 02/10 - 08/19i
+ see group behavior, consensus,
(common) beliefs, peer pressure,
Better live happily together than decide what is the best?
Groupthink is not a neutral word about sharing some thoughts with
your neighbors and colleagues.
It applies usually to faulty analysis and decisions made by groups
when members become dominated by the wish to avoid inside
This wish overrides the aim to do a rational and full analysis of the
An excessive desire to reach a consensus (*) sometimes
deteriorates mental efficiency, reality testing, wisdom and
(*) However rational could be the motives to preserve
the group cohesion and goals, and the advantage found
in exchanging informations and ideas with other people.
Pros and cons
Normally, in a group, people are supposed to analyze things better than they
do individually, by combining information and ideas from all members.
This is sometimes called the "wisdom of crowd".
That angelic concept is debatable and a bit illusive, as emotions can
interfere and individuals become often "under influence".
They tend to abandon they own ideas and to adhere to the group
majority thinking (common opinion).
There are even cases when the debate escalates towards
the most radical opinions and behaviors, as every member wants
to show its zeal towards the group and therefore throws more gasoline on
This is a kind of "escalation of commitment" (see commitment).
(*) To find those messages: reach that BF group and, once there,
1) click "messages", 2) enter your query in "search archives".
Members of the BF Group, please
vote on the glossary quality at BF polls