This next paragraph from the Article is interesting – it essentially says that all Market Participants can be a bit mad and prone to psychological errors but that these cancel each other out if these traits are common on both the Sell and Buy side of the market. Problems start when everyone starts thinking the same and this makes sense in my experience. For example, when Fear grips the markets and we get a general sell-off, then people are mostly thinking the same and there are lots of people selling and very few buying – it is only once it gets extremely low that the fearful Sellers dry up and the Buyers can then take the upper hand and before long the people who were Sellers now become Buyers and everyone starts thinking alike again and driving the Prices up. Herd mentality and all that.
“The presence of overconfidence alone doesn’t create an inefficient market. Indeed, a market with overconfident buyers and sellers on both sides creates a heterogeneous, diverse, and therefore wise crowd. But crowds tend to go mad (and thus inefficient) once investors all start to follow the same rules and think alike.”