The Signal and the Noise: Why So Many Predictions Fail-but Some Don't

by Nate Silver

The instinctual shortcut that we take when we have “too much information” is to engage with it selectively, picking out the parts we like and ignoring the remainder, making allies with those who have made the same choices and enemies of the rest.

This is herding. And there’s evidence that it’s becoming more and more common in markets. The correlations in the price movements between different stocks and different types of assets are becoming sharper and sharper,76 suggesting that everybody is investing in a little bit of everything and trying to exploit many of the same strategies. This is another of those Information Age risks: we share so much information that our independence is reduced. Instead, we seek out others who think just like us and brag about how many “friends” and “followers” we have. In the market, prices may occasionally follow the lead of the worst investors. They are the ones making most of the trades.