Groupthink - the Forum Trap

[Lizard]

I am sure I am not the only forum member that occasionally mulls over the place and usefulness of on-line forums. In considering their place as an investment decision-making tool, the well-known essay on the place of open source software, "The Cathedral and the Bazaar", has provided some great parallels. To loosely paraphrase, making investment ideas widely available to scrutiny, testing and experimentation will more quickly identify flaws (and strengths) than will asking for guidance from a small enclave of experts (brokers/newsletter writers).

Mostly forums seem to fulfil this role well. But it is also not uncommon to watch highly active threads of enthusiastic investors persist on stocks which go nowhere and turn out to be dogs. On reflection, I think this is often due to the descent into the behaviour known as Groupthink. Groupthink (http://en.wikipedia.org/wiki/Groupthink) occurs when groups fail to critically test ideas because of a desire to minimize conflict. This may cause members to make "hasty, irrational decisions where individual doubts are set aside".

Factors which might contribute to Groupthink developing on a thread include a strong leader, bombardment with positive pointers (especially those which are difficult to verify or debate) and strong quelling or discouragement of dissenting views. Groupthink is overcome by encouraging the airing of doubts or objections, by playing "devil's advocate", getting independent views and by the simple awareness of its dangers and a determination to think independently, despite conflict.

Groupthink costs us money. Think independently. Don't discourage posters with alternative views. Don't attempt to dominate a thread. Don't be backwards about posting a dissenting view or playing devils advocate. If you spot the signs of Groupthink developing, be aware of its potential deleterious effect on your decision-making. :)

[stephen]

I go through cycles of reading ST every day, and then leaving it alone for weeks.

If I look at my portfolio history, I can see examples of ST groupthink working against me.

ST has worked best for me where it has thrown up something to investigate, and then I have done the legwork myself. It's been a disaster where I have allowed the enthusiasm of others to carry me along.

These days what I look for most are posts where people explain their thinking and their techniques -- where they show how they make their discoveries. I'm not so interested in their conclusions any more.

[limegreen]

I guess to my mind the merit of ST is as Stephen suggests, using it as a pointer to stocks to investigate. And avoiding getting bogged down in the rhetoric.

[Mick100]

Good subject Lizard
Something I always keep in mind when dealing in the markets, and often in general life, is that the majority (the consensus opinion) is usually wrong.

There are different ways of using forums.
I have a clearly defined strategy - if an investment doesn't fit into my stategy then I won't give it a second look.
When you started the ESSA thread last yr I was looking to add mining services companies to my portfolio. ESS was one of four companies that I bought during a 2 - 3 month period. If I hadn't been looking for mining services cos I wouldn't have investigated ESS and subsequently bought it.

The NZO thread is an example of group think in action IMO.
I also hold NZO - my initial purchase was at 31c, probably before the the NZO thread was started. I have seen people who appear to have been sucked in by the constant hype on the thread (when the shareprice is rising) and then those same people become discouraged and sell when the shareprice goes into consolidation for a long period of time. One thing to remember is that "group think" is ocassionally right.

If you are an independent thinker, you should not be sucked in by group think and hype - you will see it for what it is.
IMO, those people who are independent thinkers will enjoy a far higher level of success, over the long run, in the markets.
.

[frostyboy]

i reckon when every body is in consensus, the momentum has stopped and the tide likely to turn. like when every body is in agreement about the price going up, everybody has got or made their purchase. there is no one left to buy the price, so no one to push the price up.

same with a downward price when everyones saying its rotten, there every ones sold the price no one left to push the price down, only left with people with the reserved $ to buy

this idea cant strictly be applied, but is a view of the market to make strategies from.

[stephen]

And just to expand on something Lizard touched on, it's in the disagreement that we see the true value.

If A says "this is a great buy, for these reasons", and then B says "I disagree, for the following reasons" then it is a far more educational exchange than if B says "yeah, me too."

(Although I had a little chuckle just now at the marvellous consensus developing in this thread...)

[FarmerGeorge]

There probably aren't too many farmers with degrees in psychology but I happen to be one of them. Groupthink could indeed emerge on these forums but it's best to remember the negative effects of groupthink tend to emerge most strongly when outside information is not taken into consideration due to excessive group cohesion and trust. If we feel more likely to trust people on an electronic forum than others close to us with potentially conflicting views, then I think there may be more pressing issues to deal with than losing a few dollars on a bad investment.

[Snow Leopard]

Good thread Lizard

Groupthink, I would suggest, is one aspect of or manifestation of crowd psychology. Over the years various threads on Sharetrader have exhibited strong biases for a number of reasons:
Sharing the joy of a rising share price;
Seeking mutual reassurance that the falling investment will turn and prove a winner;
The majority attempting to convince a minority that a particular share holding is currently a bad idea.

It is this crowd psychology that sees share price and market extremes being able to see this occuring without becoming one of the herd is an advantage in investing.

[winner69]

You guys could be intersted in reading "The Abilene Paradox" by Jerry harvey - based on this story -

“ On a hot afternoon visiting in Coleman, Texas, the family is comfortably playing dominoes on a porch, until the father-in-law suggests that they take a trip to Abilene [53 miles north] for dinner.

The wife says, "Sounds like a great idea." The husband, despite having reservations because the drive is long and hot, thinks that his preferences must be out-of-step with the group and says, "Sounds good to me. I just hope your mother wants to go." The mother-in-law then says, "Of course I want to go. I haven't been to Abilene in a long time."

The drive is hot, dusty, and long. When they arrive at the cafeteria, the food is as bad. They arrive back home four hours later, exhausted.

One of them dishonestly says, "It was a great trip, wasn't it." The mother-in-law says that, actually, she would rather have stayed home, but went along since the other three were so enthusiastic. The husband says, "I wasn't delighted to be doing what we were doing. I only went to satisfy the rest of you." The wife says, "I just went along to keep you happy. I would have had to be crazy to want to go out in the heat like that." The father-in-law then says that he only suggested it because he thought the others might be bored."

The group sits back, perplexed that they together decided to take a trip which none of them wanted. They each would have preferred to sit comfortably, but did not admit to it when they still had time to enjoy the afternoon.

[Lizard]

That sounds like the kind of family I grew up in! [8)]

While I agree with those who say "DYOR", I also see it as something of a cop out to suggest all the onus is on the reader. Or to assume that our research will not be coloured by the opinions we have previously read.

Personally, I have had some very expensive lessons on this. In fact, the worst cases have been where I have read the opinions of other posters that I respect highly before doing my own research. In hindsight, I can see how the positive (or negative) opinion of a poster I respected has percolated my thinking, despite the fact my own research may have been looking at different aspects of the company to those commented on.

In my case, using forums to generate ideas or screen stocks before doing research works less well than using it to check back on stocks I've identified from stock tables/databases and already researched.

[foodee]

Lizard
That reminds me of what an old professor told me in my
varsity days(Gosh that was a long time ago)..
He said son..part of the stuff I lectured you on will
prove to be bullsh.t. Problem is I don't know, at this
stage, which part.

cheers

[Mick100]

quote:Originally posted by Lizard


While I agree with those who say "DYOR", I also see it as something of a cop out to suggest all the onus is on the reader. Or to assume that our research will not be coloured by the opinions we have previously read.

.



Lizard, You have to assume that the person writing about a stock he/she holds is going to have a biased opinion on that stock - particuarly if they have just bought it recently. I know that I am anyway.
.

[shasta]

quote:Originally posted by foodee

Lizard
That reminds me of what an old professor told me in my
varsity days(Gosh that was a long time ago)..
He said son..part of the stuff I lectured you on will
prove to be bullsh.t. Problem is I don't know, at this
stage, which part.

cheers


Foodee that quote is genius...add that to your signature!

[winner69]

quote:Originally posted by Lizard

That sounds like the kind of family I grew up in! [8)]



So you didn't stand up for yourself then Lizard -- went along with the consenus -- collectively everybody agreed but individually we disagreed .... almost groupthink in action

[shasta]

I think you lot are talking yourselves into your very own "groupthink"!

Lizard we need to talk next Saturday!

[Lizard]

quote:Originally posted by winner69
So you didn't stand up for yourself then Lizard -- went along with the consenus -- collectively everybody agreed but individually we disagreed .... almost groupthink in action


We middle children learn life's most important lesson early - keep your head down; and quietly move the ground under their feet! :D

[Lizard]

quote:Originally posted by shasta
Lizard we need to talk next Saturday!


Of course Shasta - just so long as it's not about football! [:o)]

[skinny]

Interesting thread. As a fundamentalist investor with a strong contrarian twist I dislike following the herd. But still I have done fairly well doing just that over the years, one just needs to have pretty disciplined exit strategy in place for the inevitable corrections.

One thing I have noticed about sharetrader is that, relative to North American forums, there is much much less critical commentary of stock choices. I dont think this is because kiwis (and certainly our west island cousins) are more polite - more I think that there is not the ability to short sell most stocks so there isn't the incentive for punters to get stuck into stocks they think are over priced. (Save for a few posters like Halebop who is prepared to post some decent analysis on stocks not held for the hell of it.)

The 'bashing' you get on this channel is more often that not just a thinly disguised attempt to drive down prices to buy at a lower level; or perhaps the odd shrill voice of regret from selling too early (e.g. the Scottsman on the NZO thread :D)

Anyways, in sum going with the herd can enhance returns, just try not to get trampled [:o)]

[duncan macgregor]

I was told as an apprentice carpenter you do it this way up to the time you think up a better way. Everything you do can be improved investing is no different. To follow the herd or to never change your view point is the sign of having a closed mind. Can you imagine if all the catholics in IRELAND had been born in protestant homes and visa versa they would still be as bitter on the other side.
Investors follow this trend. The smart investors take notice of the herd reaction to different sets of circumstances and use it to their advantage. I used to find it amusing as a little brat to kick the side of the chook house to see the panic. Chooks flying out squacking and cackling. Some things never change the NZO thread is my new chook house.[:o)]:D:Dmacdunk

[Scuffer]

Well put Dunk my philosophy as well be in the world but not a part of it then you can see the wood despite the trees you being a carpenter will get it.:):)

[foodee]

Is our jury system an example of this GT phenomenon?

cheers

[Scuffer]

Could very well be, depends on whether the jurors just wanna get out of there, which most usually do.

[miner]

As a general rule you should be cautious of any poster using emotive language in there posts.

Cheers
Miner