I admit it. I’m a big fan of Twitter. It’s allowed me to connect with people from across the globe, people that it would be impossible to communicate with least of all know existed prior to Twitter. The people I follow have opened my mind to ideas and opportunities that I wouldn’t have heard about otherwise.
Individual investors decisions often depend on the ideas and behaviour of other investors, investors that we increasingly find on Twitter (or FinTwit). When we perceive that a high proportion of our ‘group’ are going to act in a certain way then we are more likely to also. However, as individuals we rarely have global knowledge of others, but instead must estimate them from the local observations of our social contacts.
And that’s a problem if you are relying on the latest tweets from investors in your feed to gauge the ‘markets’ opinion.
Network structure can significantly distort individual’s observations. Under some conditions, a state that is globally rare in a network may be dramatically over-represented in the individuals within your group. This effect is known as the “majority illusion” and could lead an individual investor to systematically overestimate the prevalence of the actions of other investors.
Humans have a tendency to think that what we see is all there is. Beware: the majority can sometimes be an illusion.