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Psychology of Misjudgment #15. Social-Proof Tendency


LongHaul
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15. Social-Proof Tendency

 

"The otherwise complex behavior of man is much simplified when he automatically thinks and does what he observes to be thought and done around him. And such followership often works fine. For instance, what simpler way could there be to find out how to walk to a big football game in a strange city than by following the flow of the crowd. For some such reason, man’s evolution left him with Social-Proof Tendency, an automatic tendency to think and act as he sees others around him thinking and acting."

 

“Monkey-see, monkey-do” is more than a turn of phrase. Social proof leaves people susceptible to groupthink and herd behavior.

 

In investing, the crowd is a comfortable place to be. Most investors would rather be wrong with everyone else, than wrong by themselves. What doesn’t help is how the nature of cycles makes it more profitable to be independent of the crowd at the extremes of the cycle.

 

The solution:

 

Learn how to ignore the examples from others when they are wrong, because few skills are more worth having.

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I think questioning what everyone else is doing is also very important.  Does this makes sense for me?  Is this the most effective way to do this?  Just because something has been done for a long time doesn't mean it is the best way.

 

It helps to have an independent type of personality - not a crowd follower but also not always a cynic.  To be independent is to try to rationally choose the best approach.

 

Drive the speed limit, know what businesses are worth and why, eat healthy, etc.  eh - those are my personal views anyhow.

 

Helps to be aware of the concept of social proof too.  Not always to easy to do something different.  How many of us have done stupid stuff in our teenage years because of this?

 

 

 

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There is a tendency to view social proof or groupthink or herd-following (or whatever you want to call it) as bad; or at least suspicious.

 

First, social proof is sometimes quite good. As a herd of elephants or water buffalo will show you, there is safety in numbers. Humans developed this way for a reason: nature can be cruel and unforgiving, and it is easier to survive as a group. In most cases, we are greater together than alone.

 

Secondly, there is an embedded act of selfishness in questioning the group activity, or as you put it, "does this make sense for me". You may in fact find alternatives which are best or better for you, but overall may be worse for the group. I would suggest that if everyone were to behave in this manner all the time, it would make for some sad society.

 

Better is to find alternatives that aren't just better for you, but are better for the marginal groupmember. That is, you create more overall value with a new approach than you destroy by dismantling the old approach. This is where questioning the herd can be beneficial for both yourself and everyone else.

 

Finally, I would also argue in some instances, it is simply not smart to sit back and question the group. Imagine if handfuls of soldiers put down arms and questioned the approach during the storming of Normandy on D-day. Maybe not a perfect example, but you get my point. Sometimes following an imperfect solution is better than waiting to machinate a perfect solution.

 

Just food for thought!

 

 

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So happy to apply this concept today with my daughter's "lemonade" stand (but with vegetables she has grown). We set up in front of the driveway, and I put in a few bucks into her empty mason jar. She looked at me puzzled and asked why I did that.

 

"Let me tell you a bit about social proof..."

 

She's 10, and she got it. Warms the rational heart.

 

 

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That's great BPCAP.  I think the early the knowledge of psychology the better as they can spot more patterns.  I have found with my kids that they can grasp a lot of these concepts fairly young 7+.  I taught my daughter about ego and she used it correctly when to tell me that some action was my ego. 

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So happy to apply this concept today with my daughter's "lemonade" stand (but with vegetables she has grown). We set up in front of the driveway, and I put in a few bucks into her empty mason jar. She looked at me puzzled and asked why I did that.

 

"Let me tell you a bit about social proof..."

 

She's 10, and she got it. Warms the rational heart.

 

That's brilliant. Thinking in that aspect, that could be the reason why in some aquariums/museums/public places where you throw coins into the water structures, they do not clear the coins immediately.

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Ultimately you have to be able to think for yourself, and be comfortable executing your decision. Because when you make an investment you are forecasting an outcome over a specified time frame, and backing your forecast. 'Success' means you were directionally correct, AND within the time horizon. However, to many people 'putting your money where your mouth is' - is paralysing. No confidence.

 

Social licence is before the fact, social proof is after the fact - licence is priming the pump ($ in the mason jar). proof is ending with more than you started with. Make the mason jar bigger, and you have the structure of most HF's. Relying on proof essentially dooms you to always being a follower, and momo trading. Nothing wrong in that - provided that is your style, and you are good at identifying the patsy. Hence all the poker and gambling literature.

 

Licence to 'set' the game, is valuable, and comes with responsibilities (don't manipulate). Doing your own thing is essentially 'setting' a game, that the market will hopefully reward you for (via a gain). if your 'set' is a short position, don't rub it in the markets face, if your 'set' is a long position, don't lord it over everyone else - responsible behaviour.

 

If you're prone to this - you essentially have no confidence in your decisions, and are unable to step away from the flame.

Either invest very little, or hand your investment dollars to someone else to manage on your behalf.

 

SD

 

 

 

 

 

 

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Guest cherzeca

nice thread.  I would distinguish between "collective action" and what I will call "many doing individually".

 

collective action requires a certain sublimation of the individual...the point about everyone on the beach on normandy saying to themselves this might not be a great idea, but it seems the best we have, so let's go as we are all depending on each other.

 

I view the stock market more as "many doing individually", whereby one can look at what others (the market participants) have determined to be a good plan, but it is up to each one to decide whether it is a good plan for him/herself.  it does set up the frame though...if it is good for them why not also for me?  I suppose operating with that social frame saves a lot of individual work

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