The more people passively index, the more the market becomes sensitive to small changes by those using an active strategy.
Think of index fund investments as increasing gain on an amplifier — the more gain, the higher small signals can get boosted. An index fund is basically following the active investors and putting more weight behind each of their decisions. More passive investment money means a higher amplification factor.
If you go to a restaurant, point to the person next to you, and say "I'll have what they're having" then you'll get a meal of some sort. You may be happy with it, but who chose it? The person next to you. What if everyone does this? Who decides the initial meal that will propagate to all customers? One person.
Think of index fund investments as increasing gain on an amplifier — the more gain, the higher small signals can get boosted. An index fund is basically following the active investors and putting more weight behind each of their decisions. More passive investment money means a higher amplification factor.
If you go to a restaurant, point to the person next to you, and say "I'll have what they're having" then you'll get a meal of some sort. You may be happy with it, but who chose it? The person next to you. What if everyone does this? Who decides the initial meal that will propagate to all customers? One person.