The Danger of Social Learning
{insert_credible_guy_here} said that {insert_your_favorite_asset_here} is going to {insert_target_price_here}!! Hurry up and mortgage your homes to go all in wouldn't you?
Recompound has repeatedly preached that being too reliant on external information can be dangerous, especially in investing. From our conversations with over 100+ clients, we found that retail investors often rely on the following information when making investing decisions:
Recommendation from paid investing groups (group berbayar)
Recommendation from influencers
Investment classes
Info from insiders (orang dalam)
News
Friends and family
We totally understand why retail investors (read: you) rely heavily on such external information.
I have a full-time job and family commitment
I cannot possibly spend my evenings studying financial statements and doing my own research
I don’t understand math
Even if I tried studying financial statements, they all look like gibberish to me
In some sense, relying on external information is just like an act of specialisation. If I am a baker, I will bake cakes and run a bakery. Someone is an investment expert, so he analyses financial statements and run a paid investing group.
I pay him to receive stock recommendation; he pays me to get cakes.
Efficiency, hurray!
Having a community
Theoretically, the idea of just receiving stock recommendation from the investment expert is good. I save my time and energy, and get recommendation. The investment expert does what he’s good at, create value, and earn money. But there is a big fat assumption here: his recommendation is correct.
Let’s look at an example of an investing community where people learn from one another.
There are 6 people in this community. Let’s call them Alice (A), Bob (B), Carol (C), David (D), Erin (E), Frank (F).
Each of them do 3 things:
Form an initial belief. A person can have initial beliefs that are backed by proper research or no proper research. Examples of the latter include beliefs driven by feelings (e.g. I like Elon Musk, so I’m bullish on Tesla) or even being paid to promote a company — this is the case of market makers (bandar).
Believe in oneself. A person may have strong conviction over what he/she believes in. If not, it means that his initial belief does not matter; he will readily abandon his belief and learn from people he trusts (next point).
Learn from others. A person can learn from another person. Learning is not symmetric, meaning if I learn from A, it does not mean that A learns from me. I can also learn from multiple people, and my level of trust varies across people. For example, I learn from Alice and Bob; but I trust Alice more than Bob because lets say Alice is a subject matter expert and Bob is just a hobbyist. So naturally I put more weight on A’s belief than B’s.
To make things more interesting, next let’s give these 6 people some identity and actions that mimic a real life investing community.
A is a market maker. He is paid by an entity to promote its stocks
B is a very well-connected guy. He is connected to a market maker (A) and people from investing groups
C is the wife of F (see next)
D, E, and F are members of an investing group
D likes to do his own research and believes in himself quite a bit
E also likes to do some of her own research, but is more open-minded to learn from others
F is a passive observer in this group
First, each person has an initial belief
Let’s use an example of whether one should buy GOTO IPO stocks or not*
*Note that this is not a recommendation to buy/sell GOTO, nor is this a reflection of our opinion on GOTO. This is just a fun thought experiment. Also, GOTO can be replaced with any asset you fancy such as Bitcoin, Ethereum, Doge, Shiba Inu, etc (you get the idea). We are just using GOTO as a placeholder asset.
Here is the initial belief of each person, where 1 indicates that we should buy GOTO and 0 indicates we should not buy GOTO
Believing in oneself
First things first, this and the following are the only hard subsections that you need to grasp (and a bit of matrix multiplication later on that we all learned in high school). If you grasp this, you are good to go.
Don’t get thrown off by notations!
Now let’s show how much each person believes in him/herself.
In the figure above,
the looping circle indicates how much a person believes in him/herself. This number ranges from 0 to 1.
0 means you don’t believe in yourself at all.
1 means you only believe in yourself.
If you don’t believe in yourself at all, you don’t have a looping circle. If you do, you have a looping circle.
Because A is a market maker, he only believes in himself and doesn’t care to listen to anyone.
D is very opinionated and trusts his own research a lot, so he believes in himself quite a bit — with a weight of 2/3.
E is quite open-minded and wants to learn from others’ opinion, so her self-belief is moderate — with a weight of 1/2.
The rest? No idea what they are doing. So self-belief is 0.
Learning from others
Now let’s see who learns from who in this network.
To remind everyone, please don’t be afraid at the graph. Heck, actually don’t look at it now or you’ll get thrown off. Go through the explanation below first as they are quite simple and intuitive. Then check out the graph when you are done.
So here’s how everybody is learning from others:
A is a market maker, so he doesn’t bother listening to anyone
B is very well-connected. He learns from:
The market maker A (he believes A the most with weight 1/2),
His favorite bakery owner C (weight of 1/4),
and his investment enthusiast friend E (weight of 1/4).
C is busy and dislikes math, but she is encouraged to invest by her husband F. So she learns about investment recommendation from her husband F fully (weight of 1).
D trusts himself quite a lot and he’s quite intelligent. So he likes to learn from others who also do their own research. He’s not interested in learning from people who just heard from others. So he only learns from E with weight 1/3.
E does her own research, but also learns from:
B because of B’s connection with the market maker A (weight of 1/4).
D whose analysis can be quite solid (weight of 1/4).
Btw, E trusts D and E equally, each with a weight of 1/4.
F is new to investing, so he learns from everyone in the investing group. He learns from D and E with equal weight of 1/2
Beliefs change after rounds of interactions…
A person’s belief can change after he/she learns from her network. Suppose that my opinion changes based on the (weighted average) opinion of the people I learn from.
Remember: Person B starts from believing that he should not buy GOTO — his belief is 0.
Why? He’s a management consultant who has absolutely no time to learn about investments. So he’s initially suuuper skeptical but with no self-belief.
So then he goes on to interact with everyone in the network and naturally he would update his self-belief. Remember:
He learns from A the market maker (influence 1/2)
He learns from C (influence 1/4)
He learns from E (influence 1/4)
Why A has the most influence? Dia bandar bosss punya koneksi ;) (He’s the market maker).
After which he goes on to update his belief. Mathematically, it is easy to do so by multiplying each weight by the belief of each person. It becomes like this:
Do you notice that B goes from having a belief of 0 to 3/4 after one round?
More generally, you can write b’s belief after 1 round to be like this where w is the weights that we discussed earlier and p are the beliefs of each person he learns from in round 0 (or previous round):
That is really neat! So now how do we get the belief for everyone (A, B, C, D, E and F) to see how their opinion would change after one round of interaction? Well, we do a matrix multiplication.
Recall A and E initially belive GOTO is the goat and people should invest in GOTO, so their belief initially is 1. A is the market maker while E is the investment analyst. Others, don’t really believe in GOTO so their belief initially is 0.
People’s belief can be represented in a 6x1 matrix where each row represent A, B, …, F’s beliefs like this:
Now we can also represent the degree of learning (influence) from the community in a matrix format (lets call the 6x6 matrix T) like this:
At this point of the blog, Budi cringes so much he was like: Aduuuu so much math Toby…
Toby: please, please let me explain
Remember, each row represents the weight of learning of a participant from another participant in the community. To wit:
Row 1 is the market maker’s (A) learning from the community. He only believes in himself so does not learn anything that’s why (1,2), (1,3)… (1,6) are all 0s. (1,1) is 1 because he believes in himself.
Row 3 is Carol’s (C) learning from the community. Well, she is a baker and does not do investing so he only learns investing from Frank (F). That’s why (3,6) has a weight of 1. And (3,1), (3,2)… (3,5) are all 0s.
And you get the idea. Plot the numbers and you’ll get the numeric representation above (matrix T).
We can apply this matrix T to the beliefs of the participants (doing a matrix multiplication) and then get an updated belief after the interaction. To wit,
after 1 round of interaction you get:
after 2 rounds of interaction you get:
after 3 rounds of interaction you get:
After 50 rounds of interaction:
After 200 rounds of interaction:
From this point onwards, the belief remain the same. At the end of the day, everyone believes that they should buy GOTO.
“Correct” beliefs
We don’t care about which belief is correct. That is not the point of this thought exercise.
If indeed 1 is correct — GOTO (or Bitcoin or NVDIA or others) is an asset worth investing — then great. But if 0 is correct, then everyone ends up having the wrong beliefs, taking the wrong action, and losing money.
The belief in question can easily be changed, such as to: Who is the best badminton player in Indonesia? Which president should we vote for? Is Indomie or Mie Sedap better? We should eat more protein. We should all become vegan. Etc etc.
Now you see how easy it is for someone influential — can be an influencer, stock market maker, political leader, famous actors/actresses — to change the opinion of people. Given enough money, an entity can pay many influencers in with a lot of trusting followers and push forward an agenda.
If it’s a good agenda, then great!
But if it’s a wrong agenda, then we’re in for trouble.
So folks, be aware of the danger of social media. Be cognisant in forming your own beliefs, trusting yourself, and who you want to trust.