James Montier, in his work “Behavioural Investing: A Practitioner’s Guide to Applying Behavioural Finance,” sheds light on the pitfalls of group decision-making in trading. While it’s often hoped that groups can collaborate effectively, share ideas, and arrive at sound conclusions, the reality of group behaviour can be quite different. Studies by psychologists have revealed that, on average, groups tend to amplify decision-making biases rather than mitigate them.
Montier identified several key issues with group decision-making:
1. Reduced Variance of Opinions: Groups often narrow the range of opinions among their members. After group discussions, individuals tend to become more confident in their decisions without necessarily improving their accuracy. Moreover, group members who align with the collective view may gain enhanced credibility within the group.
2. Difficulty in Uncovering Hidden Information: Groups are generally ineffective at uncovering concealed information. In fact, members who conform to the group’s perspective often enjoy greater perceived competence and credibility.
3. Cascades: Groups are susceptible to cascades, wherein members abandon their individual insights to conform with the majority’s opinion because they assume the group must know better.
4. Polarisation and Groupthink: Groups can experience polarisation, causing members to adopt more extreme positions in line with their initial beliefs after group discussions.
There are some solutions proposed to mitigate these group biases:
1. Secret Ballots: Using secret ballots can reduce the influence of social pressure within the group. Members can independently express their views and preferences for asset allocation before the meeting, followed by vote counting and, if necessary, further debate. However, this process should be approached cautiously due to its inherent risks.
2. Devil’s Advocates: Designating a devil’s advocate within the group can help challenge prevailing opinions. However, this approach can be ineffective if the selected individual doesn’t genuinely embrace their role or if they’re not naturally inclined to contrarian thinking. Ideally, a strong contrarian with the ability and willingness to argue against consensus is needed, but such individuals are uncommon and may not easily fit into corporate cultures.
3. Respect for Other Group Members: Reducing the perils of group decisions becomes more feasible when group members are recognised as experts in their respective fields. In such cases, diverse viewpoints are more manageable, and hidden information is easier to uncover. Unfortunately, many individuals tend to overestimate their expertise in various subjects, hindering their ability to respect the perspectives of others.
So, in conclusion, don’t assume that more people making a decision makes for a better decision. The ability of one person to make a decision is not always the disadvantage that you may have assumed.