Why are you sure that everyone agrees with your view that the market is going to go up?

The false consensus effect

Momentum bias is the temporal manifestation of the bias of representativeness which encourages the individual to deduce the general rule from examples which are only anecdotes. False consensus is the social aspect of this bias.  Numerous studies, beginning with those of Ross, Greene, and House (1977)[i], have shown that there is a false consensus effect which pushes individuals to overestimate the generality of what concerns them. Thus, someone who has chosen A from among the set {A ; B} will expect a greater frequency of the choice A than those who have chosen B.  If you prefer French fries to green beans, you have a greater chance of thinking that a stranger prefers fries to green beans as well. Similarly, someone who has experienced a remarkable event will feel that this event affects more people than it does in reality. If you have been mugged twice in the past three months, and never before, you will think that crime is on the rise. Yet, your personal circumstance may not be representative. In financial matters the false consensus phenomenon leads to a bias in the evaluation that is made of the consensus in the financial community.

Based on the responses to a questionnaire of 226 professors and doctoral students, Welch (2001)[ii] has demonstrated the existence of false consensus in the appraisal of the risk premium of stocks, that is, the difference between their future return and that of risk-free bonds. He asked them to give both their personal assessment and their estimation of the consensus (the average opinion of the market) for the risk premium over periods of 1, 5, 10, and 15 years. He found a strong correlation between the personal expectations of the individuals questioned and their perception of the consensus. The more a subject is optimistic about the level of risk premium, the more he thinks that the market, whose opinion is expressed by the “consensus,” is optimistic too. From this result, Welch suggests that financiers form their valuation of the consensus from their personal assessments. In general, they think that the consensus is slightly more optimistic than they are.


The size of the false consensus phenomenon depends greatly on the context.  According to  psychologists, the effect is all the more important if:

-  the individual is in contact with others who are like him in many ways (friends,     colleagues);

-  he perceives his reactions as arising from the situation (“state” of the market) more than  from his personal frame of mind;

-  his attention is focused on a single factor (the hike in the market) rather than on several;

-  he is very confident in the correctness of his stance; and

-  the stakes are important (his money) and constitute a threat for him (self-esteem, reputation).

Source: 50 psychological experiments for investors, Mickaël Mangot, Wiley (2009)

[i] Ross, L., D. Greene, and P. House, “The False Consensus Phenomenon: An Attributional Bias in Self-Perception and Social Perception Processes,” Journal of Experimental Social Psychology, 13, (1977): 279-301.

[ii] Welch, I., “The Equity Premium Consensus Forecast Revisited,” (Cowles Foundation Discussion Papers, Yale University, 2001).