This is far more applicable to traditional, actively-managed mutual funds than it is to index investing. In a mutual fund a handful of people select the stocks

This is far more applicable to traditional, actively-managed mutual funds than it is to index investing. In a mutual fund a handful of people select the stocks to invest in and do so arbitrarily. Sometimes there are specific goals or sectors in mind but other times it is just to chase performance. In an index the goal is to buy everything of a kind: all of the stocks in the S&P500 or all of the stocks listed on the NASDAQ. A handful of people aren't arbitrarily deciding which of the 500 biggest companies are. The goal of the index investor is to get average performance - active traders can worry about the microeconomics. If too many people index invest then there will be huge market inefficiencies for active traders to make money on, which will attract more traders to the market, which will make the market more efficient.