Group dynamics - Madness or Wisdom of Crowds

"Madness is rare in the individual - but with groups, parties, people and ages it is the rule" - Friedrich Nietzsche 

Group madness may seem to be everywhere, yet there are two interesting strains of group psychology research at odds with each which should give investors pause. Groups dynamics can have two sides, a positive and negative; the delusion and wisdom of crowds.  

One research direction shows the value of crowd thinking. There is wisdom in crowds. The aggregate opinion of the group is better than the opinion of the individual. The average of the group through blending of diverse views can outperform the opinion of an individual. 

The other group research or view focuses on the delusion or madness of crowds. The rationality of the individual is lost in the anonymity of the group. Group dynamics will reinforce common views and lead to extremes. Bubbles are the result of crowd extremes and not the behavior of individuals. Although the crowd may just be individuals thinking the same, the group dynamics can reinforce common beliefs. In the group, there is a loss of responsibility that causes extreme behavior.

Upon looking at crowd psychology, I can say that this is an area that needs more research. The narrative of crowd irrationality has been longstanding, yet theories that can explain crowd dynamics are conflicting and have not tested well. It is not easy to run a crowd experiment and observation alone may not be convincing. The wisdom from crowds and aggregating diverse opinions is compelling and has intuitive appeal but needs some strict assumptions which limits its universal appeal. 

The simple view for investors - average diverse opinions, you will get closer to the truth; avoid crowd dynamics, exuberance is likely to be reversed.