AI and the Strengthening of ‘Herd Mentality’: Part 2 of 2

Artificial intelligence related tools provide material scope for cognitive offload as investors grapple with information overload. 

Yet when coupled with the decline in critical thinking it also has the potential to materially change the dynamics of asset markets. These potential changes are a by-product of the impact of post information revolution information flows, in conjunction with artificial intelligence, on the importance of qualitative anchors as a driver of individual investment decisions. 

A fuller appreciation of these potential impacts will be important for investors to be in a position to profit from the changing dynamics within and between asset markets.

What is Critical Thinking?

It is claimed by many that one of the key phenomena of the information technology revolution appears to be the decline in critical thinking. 

But what is critical thinking? Specifically to think critically is also to recognise that knowledge is rarely neutral or complete, but entails an awareness of context, an attentiveness to ambiguity, and a willingness to inhabit intellectual uncertainty.

Ancient Greece is often credited as the birthplace of this intellectual approach of critical thinking thanks to the likes of Socrates, Plato, and Aristotle. 

Specifically Socrates challenged assumptions and pushed his followers to seek truth rather than settle for easy answers. So influential were his ideas that Socratic method, a form of cooperative argumentative dialogue or method of refutation, laid the foundation for Western reasoning. 

This was taken up by the Enlightenment and especially the humanist movement of the 14th-16th centuries where once again critical thinking took centre stage. Philosophers like John Locke, Immanuel Kant, and Voltaire emphasised reason as a tool to understand the world and improve human conditions. 

It is therefore no exaggeration to say that critical thinking inspired the revolutions, advances in science, and rise of democratic ideals thereby creating the modern society that exists today.

Information Revolution and the Decline in Critical Thinking

Given the historical debt owed to critical thinking it is accordingly with a degree of angst that many have commented on its apparent decline in the post information revolution society. The information revolution refers to the way in which information is accessed and shared following the development and widespread adoption of computers and the internet. 

Through the development of increasingly integrated communication resources, a vast amount and variety of information has become available to nearly all individuals in a timely manner. The integration and the use of the internet, mobile communication devices and social media applications now means that news on the other side of the globe can be shared almost instantaneously.

While the information technology revolution has provided unrivalled access to information it has also overwhelmed individuals with noise and sensationalism. The initial issue is that the sheer scale of content available means that there is a lot of ‘informational noise’, which refers to the level of meaningless or redundant content which distracts from the useful information needed by a user. 

Ironically this easy access to vast amounts of content and the resulting information noise has had the perverse impact of creating information overload and fragmented thinking. The overload has seen modern society witness a multi-generational decline in reading comprehension with the average individual reading less, retaining less of what is read, having shorter attention spans while struggling to engage in critical analysis.

This is particularly worrying given the second issue, also associated with informational noise, and that is the the material increase in sensationalism. With so much informational noise the viral success of content is largely determined by its capacity to confirm biases and provoke instant reactions, conditions fundamentally at odds with the practices of sustained re-evaluation and contextualisation that critical thinking requires. 

As a result clickbait headlines and social media posts appeal more to emotions rather than intellect, making readers susceptible to misinformation. Social media platforms, which facilitate much of an individuals cultural conversations, are accordingly structurally aligned against critical thinking, rewarding speed, emotional charge, and brevity over careful analysis. 

The context, nuance, and accuracy no longer matter with objective truth becoming secondary to subjective feelings and base impulses. This bias has also spread to the more traditional forms of media where sensational stories drive ‘clicks’, and ‘clicks’ drive revenue.

The bias to bite-sized content in the viral media age has resulted in many losing the focus and patience for lengthy, complex texts. Readers increasingly scan online posts to find viewpoints confirming biases instead of considering different perspectives and are often influenced by the ‘loudest’ voices on social media rather than reasoned discourse. 

It is however overly simplistic to say that individuals have lost reading comprehension skills entirely. More accurately individuals have forgotten, or can’t be bothered, to apply these skills to the modern media. While the basic cognitive abilities have been retained, they are not being leveraged with people increasingly consuming information rather than truly digest it. 

Ultimately many opinions are being shaped by more extreme rhetoric and confirmation bias rather than reasoned and debated facts. This is the ultimate adverse impact arising from the decline in critical thinking.

Impact of AI on Critical Thinking

It is in this environment that the widespread dissemination of artificial intelligence (AI) tools provides a logical extension to the information revolution. Whereas the information revolution opened the door to noise and sensationalism AI provided the tools to comb though all the information and arrive at ‘considered opinions; i.e. cognitive offload. 

Cognitive offload allows individuals to rely increasingly on the tools to reduce mental effort. Yet these ‘considered opinions’ are the more disquieting characteristic of popular large language models (‘chatbots’) given their ability to persuade. 

Language models don’t ‘think’ per se but they do predict plausible continuations of language sequences based on statistical patterns in training data. While it is extremely impressive from a technical and linguistics perspective, unfortunately the surface coherence of AI outputs risks creating a strong impression of meaningful reasoning and logic. 

This increases the risk of anthropomorphism which is the tendency to attribute agency, intentionality, emotional states, and consciousness to systems exhibiting complex behaviour. Anthropomorphism makes it increasingly difficult for users to identify when responses warrant scepticism rather than acceptance, a difficulty that is compounded when users have come to form trusting, personal, and dependent relationships with their chatbots.

While cognitive offload is not a new problem in the post information environment it is a uniquely intensified one. In the current environment the convergence of degraded critical thinking and inflated confidence in AI outputs is especially dangerous. When AI-generated text appears plausible, users are less likely to interrogate it, even when its reasoning is shallow or flawed. 

This suggests a diminished awareness of the very need to think critically at all. Ironically just when AI is raising the need for individuals to be able to think critically this basic skillset is being degraded within society.

At its more extreme the interaction of AI tools and reduced critical thinking may result in a phenomena referred to by Sebastian Dohnány et al. as ‘Technological folie à deux’. To quote Sebastian Dohnány et al. “This is where the interplay between human and chatbot biases creates conditions for bidirectional belief amplification - wherein users and chatbots iteratively drive each other toward increasingly extreme belief patterns”. 

This sets the conditions for a harmful feedback loop, ultimately resulting in a technological folie à deux, a psychiatric phenomenon where two individuals share and mutually reinforce the same delusion. The result is a dynamic which further undermines critical thinking by reinforcing the users existing beliefs.

Impact on Investing

The potential implications of this confluence in dynamics may be a material increase in volatility across and within asset markets. To see why consider that within paradox theory (see earlier article “Taking Greed out of Herd Mentality” for a more detailed description of Paradox Theory) there are two anchors namely quantitative and qualitative. 

The decline in critical thinking in conjunction in AI may result in an increasingly number of investors placing greater weight on qualitative anchors when making investment decisions. If this is the case then the investment styles may be increasingly distinguishable into :

Value Focussed : Tend not to follow the herd with the aim to minimise expected losses by investing in assets that are trading at a material discount to an intrinsic value. This assessment of intrinsic value becomes the quantitative anchor; i.e. invest in assets which exhibit a material safety buffer versus the quantitative anchor.

Momentum Focussed : Invest in assets that have recently performed well aim to minimise expect losses in the belief that the recent performance based on a broadly spread ‘story’ will continue; i.e. aim to ‘ride the wave’ of an asset’s momentum. Such investors are only focussed on the qualitative anchor when assessing the risk of a loss and may accordingly be more at risk of underestimating the actual expected loss associated with an investment decision.

With Value Focussed investing less impacted by these developments the more material impact is likely to be on Momentum Focussed investing where an increasing number of investors may be drawn. Indeed it is the very factors behind qualitative anchors which are most likely to be influenced by AI and the decline in critical thinking. 

Not only are less sophisticated investors more likely to be drawn to utilisation of qualitative anchors, but the use of common AI tools to sift through the informational noise materially increases the risk of :

• Reinforcing confirmation bias (the tendency to interpret evidence in ways partial to existing beliefs and expectations) and motivated reasoning (the preference for information that maintains emotional comfort and leads to desired conclusion) and
• Feedback loops incorporating asset price movements generating a greater convergence in information sets when making investment decisions.

The likely result is a material increase in herd mentality which may increase volatility within and between asset classes.

Now it is worth noting that there is no reason to believe that either Value or Momentum focussed investing is superior to the other. Each style simply utilises different information sets and dynamics to derive additional value. The important point is to recognise that this is the case and that each requires a different approach to management. 

For example Value Focussed styles are more likely to be taking a longer term perspective and be relatively more diversified. By contrast Momentum Focussed styles are more likely to be shorter term in outlook with higher turnover and consequently greater concentration. 

For investors the key issue to address is how to construct portfolios to take advantage of the potential change in dynamics as qualitative anchors become a more important factor in driving capital flows and asset returns.

The decline in critical thinking coupled with the rise in AI tools has the potential to materially increase the reliance upon qualitative anchors for a broader base of individuals when making investment decisions. In turn this raises the risk of a rise in the systematic underestimation of the expected losses associated with investment decisions by an increasing proportion of investors. 

This increase in Momentum focussed investing and the associated strengthening of herd mentality has the potential to increase volatility within and between assets. Yet investors should not be concerned with such volatility. Rather investors should embrace the volatility and look at how their portfolios are constructed in order to profit from this volatility.