The reason, Andreassen suggested, was that news reports tend to overplay the importance of any particular piece of information. When a stock fell, its fall was typically portrayed as a sign that further trouble lay in wait, while a stock that was on the rise seemed to promise nothing but blue skies ahead. As a result, the students who had access to the news overreacted. Because they took each piece of information as excessively meaningful, they bought and sold far more frequently than the people who were just looking at the price.
In the end, of course, following the herd is not a recipe for success, since the only way to establish a competitive advantage is precisely to do what everyone else is not doing. That's why, in the long run, private information ultimately trumps public information. But in times marked by uncertainty and fear, like the year that we've just gone through, it's easy to succumb to the comfort of the crowd. The challenge for businesses and investors is to pay less attention to what everyone else is thinking and more attention to their own private information.
James Surowiecki (jamessuro@aol.com) is a financial columnist for the New Yorker.
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