According to Wikipedia1 Consensus Bias; “Is a pervasive cognitive bias that causes people to “see their own behavioral choices and judgments as relatively common and appropriate to existing circumstances”. In other words, they assume that their personal qualities, characteristics, beliefs, and actions are relatively widespread throughout the general population. This false consensus is significant because it increases self-esteem (overconfidence effect). It can be derived from a desire to conform and be liked by others in a social environment. This bias is especially prevalent in group settings where one thinks the collective opinion of their own group matches that of the larger population. Since the members of a group reach a consensus and rarely encounter those who dispute it, they tend to believe that everybody thinks the same way. The false-consensus effect is not restricted to cases where people believe that their values are shared by the majority, but it still manifests as an overestimate of the extent of their belief.” If there is any field where this insidious bias is so prevalent it is amongst retail investors.
At almost every turn, investors conflate their political views and specifically on how Washington, D.C. is politically aligned as a proxy for how confident they are in the economy and subsequently investing in general. Bespoke did a great piece on this2 where they stated regarding this phenomenon; “After the 2020 election, sentiment among Democrats surged while sentiment among Republicans fell. Sentiment among consumers from both parties has declined consistently for the last several months, and throughout Biden’s time in office, sentiment among Republicans has been weaker than Democrats. What does it say about society when people’s views towards the economy are so dramatically a function of which political party they identify with and whether it is in power or not. Find another hobby!” We note that the exclamation point at the end of their assessment was of their own doing… but we add that we love it!!
As we continue where we left off from the research cited in Wikipedia; “Additionally, when confronted with evidence that a consensus does not exist, people often assume that those who do not agree with them are defective in some way. Maintenance of this cognitive bias may be related to the tendency to make decisions with relatively little information. When faced with uncertainty and a limited sample from which to make decisions, people often “project” themselves onto the situation. When this personal knowledge is used as input to generalize, it often results in the false sense of being part of the majority.”
What would Clarity suggest? As always, dump the temptation to use emotion in the decision-making process and pivot to developing an investment thesis based on a solid discipline founded on a sound investment philosophy and strategy. Invest With Clarity®!
2. https://media.bespokepremium.com/uploads/2023/06/Bespoke-Report-060923-treiguerh5.pdf
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