19 Oct 2023 The Lessons of the Crowd

I recently visited Boone, NC and was able to make a trip to Grandfather Mountain where I enjoyed taking in the beauty of Fall. As I was admiring the changing leaves, I walked past a car in the parking lot that had a “ROBNHD” license plate. While this individual might have just been a fan of the 1973 Disney classic, for the sake of this Friday Brief, I imagine it was referencing the investment platform Robinhood.

This is relevant as the movie ‘Dumb Money’ recently released which tells the GameStop / Robinhood saga from a few years ago. If you aren’t familiar, the gist of the story is that a mob of individual investors decided to buy up shares in GameStop (a lot of the purchases on Robinhood) to the detriment of hedge funds that had short positions on the stock. There is a lot more involved in the story if you need an interesting rabbit hole to go down (outside the scope of this Brief).

In the end, this wasn’t so much a heroic story of the small guy overcoming a big company, but one that mostly resulted in the big money continuing to make big money (with a few notable exceptions). While some ordinary people made out well in this situation, a lot of them did not. The movie follows the story of the most well-known characters, and it reached pop culture in a way that few financial stories do. It became a movement, one that inspired people to do crazy things, like gamble away their life savings, get a tattoo, or even just change their car tag to one for an investment company.

What lessons can we learn from a crazed story like this one? Two things come to mind: there isn’t always wisdom in the crowd, and Hollywood doesn’t make movies about the slow path to wealth.

It is often said that you can find wisdom in the crowd, but on the flip side, one of the first hypotheticals that children learn from their parents is that if all your friends jumped off a cliff, would you? The insinuation is that just because a group of your friends are doing something, it does not make it the wise decision for you. This is easy in a vacuum – if you see your friends doing something dumb, don’t do it. This ignores the societal pressure and fear of missing out that is so prevalent in these moments. You may know the right thing to do, but if you see a group of people doing something together it is hard to have clarity.

Cliff Asness of AQR recently wrote in The Wall Street Journal on this same story and described how the wisdom of the crowd only exists when people make decisions independent of each other:

“We often correctly marvel at the “wisdom of crowds,” but this phenomenon is based on the crowd’s members being reasonably independent of one another. Think about how effective polling the audience is on “Who Wants to Be a Millionaire?” It works only because members of the crowd don’t talk among themselves. If they were to launch into fiery speeches weighing the multiple-choice answers, you’d likely get a much different and worse result.”

As we think about how we plan our financial lives, we need to always be aware of not falling into the wisdom of crowds or fiery mobs where there is no independent thought. Instead, we should stick to the tried-and-true path to wealth.

The other idea is that Hollywood doesn’t make movies about the millionaire next door (and if they do, it’s a comedy about how bored that couple is). Rather, we get movies like Dumb Money, The Big Short, and The Wolf of Wall Street. While these movies can be entertaining and we can take lessons from them (ala this Brief), they are hard to relate to for most people.

There aren’t movies that show the small everyday decisions that make an impact on one’s lives. Financial movies also rarely show the true downsides for ordinary people. In ‘Dumb Money’, you don’t see the hours upon hours that people waste just staring at screens hoping they hit it big. It also doesn’t show in detail the damage the decisions can cause years down the road. Most of the characters in these movies are still searching for their goals to be fulfilled at the end of these movies and it begs the question, is there a better way?

I would propose that it is ok to not want to follow the fiery crowd and that you don’t have to feel like you are missing out if there isn’t a movie made similar to your financial story. Focus on what is important to your own personal life and let us help you walk the financial road together. In the meantime, enjoy the beautiful Fall colors.

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