True. You do run into informational cascades once in a while (a few people start doing something, other people think they must have a good reason and follow them, and soon everyone is doing it merely because everyone else is) but most of the time going along with the group isn’t going to screw you; even if it’s objectively stupid, at least it won’t change your relative position within the group after the feces hit the fan. Also, to use a really bad analogy, if everyone else in your hunter-gatherer tribe jumps off the cliff and you don’t, you haven’t gained much because lone survivors don’t have much of a life expectancy.
A more modern example:
You work at a mutual fund. The other people in the fund are making a specific investment that has a 50% chance of tripling their money and a 50% of being worthless. You discover another investment that you believe has a 75% chance of tripling your money and a 25% chance of being worthless, but everyone else has already committed their share of the firm’s funds and no longer cares what you have to say. Which of the two investments should you allocate your share to? These are the possible results:
1) The 50% and the 75% investment both pay off.
Regardless of which investment you made, the result is the same: you made money for the firm and keep your job.
2) The 50% investment pays off, the 75% investment doesn’t
If you took the 50% investment, you’re okay. If you took the 75% investment, you look stupid and get fired.
3) Neither investment pays off.
The firm goes bankrupt and you lose your job, regardless of which investment you made.
4) The 50% investment doesn’t pay off, but the 75% investment does
If you picked the 75% investment, well, you made money, but the firm is still bankrupt. You lose your job anyway.
So if everyone else has already picked the 50% investment, there’s no reason for you to invest in anything else, because if their bet fails, you lose, too. Might as well go along with the crowd!
True. You do run into informational cascades once in a while (a few people start doing something, other people think they must have a good reason and follow them, and soon everyone is doing it merely because everyone else is) but most of the time going along with the group isn’t going to screw you; even if it’s objectively stupid, at least it won’t change your relative position within the group after the feces hit the fan. Also, to use a really bad analogy, if everyone else in your hunter-gatherer tribe jumps off the cliff and you don’t, you haven’t gained much because lone survivors don’t have much of a life expectancy.
A more modern example:
You work at a mutual fund. The other people in the fund are making a specific investment that has a 50% chance of tripling their money and a 50% of being worthless. You discover another investment that you believe has a 75% chance of tripling your money and a 25% chance of being worthless, but everyone else has already committed their share of the firm’s funds and no longer cares what you have to say. Which of the two investments should you allocate your share to? These are the possible results:
1) The 50% and the 75% investment both pay off. Regardless of which investment you made, the result is the same: you made money for the firm and keep your job. 2) The 50% investment pays off, the 75% investment doesn’t If you took the 50% investment, you’re okay. If you took the 75% investment, you look stupid and get fired. 3) Neither investment pays off. The firm goes bankrupt and you lose your job, regardless of which investment you made. 4) The 50% investment doesn’t pay off, but the 75% investment does If you picked the 75% investment, well, you made money, but the firm is still bankrupt. You lose your job anyway.
So if everyone else has already picked the 50% investment, there’s no reason for you to invest in anything else, because if their bet fails, you lose, too. Might as well go along with the crowd!