Stupidity as an emergent property

An amusing observation I've heard a couple times is that a person is smart, but people are stupid.

At first glance, this seems like a silly (or even paradoxical) idea, but I think there's actually some truth to it. Suppose that, in the aggregate, irrational behavior in groups of people does not tend to cancel out, but rather, tends to be self-reinforcing. If a herd of horses running down a trail in the woods comes to a fork in the trail, the first horse has about a 50-50 chance of going right versus going left, but the second horse does not -- it will tend to follow the first horse. The third horse will have an even stronger tendency to imitate the first two, and so on. In this way, 'herd mentality' can be thought of as a sort of positive feedback loop.

Now, think of people. For example, people buying and selling stock. Clearly, trading stocks is a much more complicated situation than a hypothetical herd of horses running down a trail. However, what if the same sort of herd mentality exists there, as well? It may be true that, on average, stock traders generally behave as independent actors. However, competing with this rationality, I think it is reasonable to say that they have a (perhaps only slight) natural tendency to imitate each other. This tendency is safely ignored most of the time, but in the case where very many traders are suddenly all buying or selling the same stock, individual traders are going to be enormously tempted to imitate the large group. After all, who wants to be the only one left out of a really hot stock? Who wants to be the sucker last in line during a bank run? If you are the thirteenth horse on the trail, and all twelve of the horses before you went left, then you figure, maybe they know something you don't know. Chances are, you'll break left, too.

Just a thought I had. This seems consistent with the observation that stock price fluctuations are a heavy-tailed (power law) distribution; these tend to imply that an underlying coupling exists in the system. Now, if I could just get my hands on some stock price fluctuation data, I might be able to really take this somewhere...