Groupthink is the language of market herds and heavily influenced by group psychology. Groupthink is simple. Forward, backward; Groupthink allows markets to run smoothly and follow momentum sequences. The herd does not think about Systemic Risk. Groupthink is also a logic of "Stick to what you know. Do not ask questions". This effect also contributes to enter in a cumulative risk build-up process that most likely results in the materialization of Systemic Risk or a severe crisis.
Groupthink does not work when Systemic Risk arrives. Panic takes over, except for a few Market Participants, such as Hedge Funds (and similar). We believe that markets are not rational. They are emotional. Sharp spikes in volatility are in play, especially in recent years. It is very difficult for Markets to price Tail Risk. Markets operate in herds who run Groupthink. Markets follow trends even if they are not logical (e.g., the so-called "shoulder-to-shoulder peer effect"). Markets are supposed to set prices correctly, but herds cannot always do this.
...Groupthink's Blind Spots
It is difficult to confirm that all Market Participants across the board understand what is going on and the status of Systemic Risk. The silent risk build-up process is real. Companies need to be prepared.
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