One of the more fascinating academic concepts (albeit with a boring name) to me is the theory of Prevalence-Induced Concept Change.[1] This has been featured in a few books and articles I have read, and many know it as the “blue dot effect.” Researchers showed people dots of varying shades on a blue to purple spectrum with the people tasked to identify which dots were blue. As the test went on, they would reduce the number of blue dots, and the people would then still find roughly the same amount of blue despite them shifting more heavily toward purple; they would identify clearly purple dots as blue. Why this matters is because they replicated this study with threatening faces (vs neutral or happy faces) and unethical proposals (vs benign proposals for scientific study). When the prevalence of what people were asked to identify was reduced significantly, humans still see what they were being asked to look out for and broaden their definition. We effectively become anchored to our current expectations despite the current environment being an exception.
How does Prevalence-Induced Concept Change relate to your clients’ investment portfolios? The market environment in the first half of this decade tells a story. The most recent JP Morgan Asset Management’s Guide to the Markets,[2] has a slide showing S&P 500 returns, “Magnificent 7” returns, and the S&P 500 ex-magnificent 7 returns. Since 2021, the “Magnificent 7” has accounted for a sizable portion of returns each year. The smallest contribution was 33% (2021), while the largest contribution was 63% (2023). In the same Guide to the Markets, another slide states the top ten companies in the S&P 500 comprised 41% of the total market capitalization as of November 28, 2025. Not only has concentration been high here for a while, but returns have also been great with the notable exception of 2022. It’s hard to argue that large tech companies have not only had an outsized impact on the broader market growth but have also adjusted investors’ perception of what sustainable growth should look like in their portfolio.
In the 2020s so far, we have already seen four years where the S&P 500 total return was greater than 18% and may see a fifth this year, with the one exception being 2022. This anomalous run can set the expectation of higher index returns than history suggest with the average being around 10% since 1957 with closer to a 7% real return average.[3] Long-term market returns can be modeled through different approaches like the Grinold-Kroner Model with looks at dividend yield, change in earnings, changes in outstanding shares and the change in P/E ratio. Looking back at the Guide to the Markets, we can see that the current valuations across the US market are elevated. While earnings have been strong, multiple expansion has played a role in market performance positively in the last 15 years with the P/E ratio of the market increasing over that period. Multiple expansion is warranted in companies with true technological disruption, which you could argue the top 10 companies in the S&P have displayed. That said, it cannot continue indefinitely. Despite what we’ve seen since The Great Recession, multiple expansion positively driving returns is not likely to last forever.
Putting all this together, the prevalence of high-flying returns for domestic large-cap equities likely has changed expectations for the asset class. Investors, acting on Prevalence-Induced Concept Change and Recency Bias, are compelled to double down on the “blue dots”—the big tech names—increasing concentration risk indefinitely in a futile chase for past returns. While risk is inherent to investing, it is always important to help clients zoom out to look at the big picture and what they are trying to achieve with their plan. Diversification and staying the course are often solid choices with a long-term view. The Pareto principal often holds true: 80% of the value is often provided by 20% of the inputs. The current market concentration has skewed the numbers even further with the bottom 490 of the S&P making up only 60% of the market cap. If investors don’t diversify outside of this, much of their returns will be tied to just a few sectors. As financial professionals, it is important that we help coach clients on potential behavioral biases and keep them focused on the long-term plan.
I hope everyone has a happy holidays and a great start to 2026!
[1] https://www.livescience.com/62962-blue-or-purple-dots-illusion.html
[2] https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/
[3] https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp
