Groupthink and the Efficient Market Hypothesis

Ask any investor and you will hear the same story ring true: the stock market is not always rational. The recent headlines surrounding Gamestop and the Reddit-backed short squeeze seems to be clear evidence that markets are not always efficient at pricing assets. What’s more, is that this is a historic moment for the finance industry when the retail investor was able to sit at the table with hedge fund giants and compete for the same piece of the pie. The strength of the individual, supported by a group of other individuals, was able to gain enough momentum through the social media platform that it enabled the power of groupthink to massively affect the stock market.

              While there have been many debates and ongoing studies, most famously by Gene Fama and Kenneth French, to test the efficient-market hypothesis, there have yet to be studies that address the new phenomenon of groupthink that is a product of the social media platforms that are now prevalent across the globe. Value investors such as Warren Buffet have taken advantage of points in time when the market has inefficiently valued an asset to purchase what will eventually normalize and provide superior returns. However, as more people get access to more information and to each other, will there be long-term changes to how we understand the stock market and the power that individuals have over asset prices?

              We have seen how companies have flocked to social media platforms and implemented marketing campaigns around social media influencers. This happens because social media platforms have direct access to individuals and the people and things they are interested in. This information and unprecedented access can be leveraged by organizations to generate more buzz about their product or company. In some ways, social media does the marketing work without much heavy lifting from the company because people get validated by those they are connected to, and that only grows as more people join in. In the same light, social media provides an opportunity for groupthink to affect the pricing of assets in the stock market. The question now becomes whether this is something that the stock market will only be affected by in the short-term or whether there are long-term effects that we need to be aware of?

https://www.kiplinger.com/article/investing/t052-c019-s002-is-the-market-rational.html