James Surowiecki on Stock Market - Dictionary of Arguments
Stock Market/Information/Communication/Knowledge/Surowiecki: Keynes compares the stock market with a beauty contest in which everyone tries to find out what the average person thinks is what other average people think is beautiful.
Surowiecki: but you have to add that there is only a chance to find out the prettiest girl if some participants really think about which one is the prettiest.
Behavior: the temptation to behave according to the image of others is almost irresistible. When investors mimic each other, the wisdom of the group as a whole falls. Some information might make things worse. The stock market bubble of the 1990s coincided with an explosive increase in financial news.
Paul Andreassen showed with students at the MIT (1) how a group with additional current information about stocks performed worse than a peer group without this information.
Andreassen suspects that newspaper reports play up the importance of every single message, which leads to overreactions.
Surowiecki: the problem of the overvaluation of news escalates when it reaches all market participants.
1. Paul Andreassen, »On the Social Psychology of the Stock Market – Aggregate Attributional Effects and the Regressiveness of Predictions«, Journal of Personality and Social Psychology 53/1987, S. 490-498._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Author1]Vs[Author2] or [Author]Vs[term] is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition.
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