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The Internet is brimming with resources that proclaim, ânearly everything you believed about investing is incorrect.â However, there are far fewer that aim to help you become a better investor by revealing that “much of what you think you know about yourself is inaccurate.” In this series of posts on the psychology of investing, I will take you through the journey of the biggest psychological flaws we suffer from that causes us to make dumb mistakes in investing. This series is part of a joint investor education initiative between Safal Niveshak and DSP Mutual Fund.
A relative of mine once struggled with a stubborn stomach problem, which included constant acidity, bloating, and fatigue. It wasnât life-threatening, but it made daily life miserable. At first, he brushed it off as stress, or too much tea and late nights, like most of us would. But after three or four months, the discomfort became impossible to ignore.
Finally, he decided to see a senior doctor in the city, one with decades of experience, consultant at a top private hospital and to a few celebrities, and long waiting lists. As my relative described him later, the aura around him was unmistakable.
But as often happens in doctor visits, the consultation was brisk. After a few quick questions, the doctor prescribed an aggressive line of checkups and treatment. That included an endoscopy, blood tests, ultrasound, and an expensive combination of medicines. The doctorâs fee and tests, which were all done at his clinic, alone cost almost âš30,000.
My relative didnât question any of it. He took some comfort in the high fees, assuming they reflected higher quality. But months passed. Despite the tests and medicines, his condition barely improved. He grew more fatigued and frustrated.
Out of desperation, he went to another doctor. This one was younger and running a modest clinic from a small flat in a residential lane. The consultation fee was minimal. The doctor listened patiently, asked about his meals, lifestyle, and work habits, and suggested something very different: a mild medicine, some changes in diet, regular exercise, and proper rest. Over the next few weeks, his condition slowly began to ease. And since then, he has not needed to return to the doctor again for that problem.
Looking back, he admitted what embarrassed him with the first doctor. He had ignored his own doubts simply because the first doctorâs stature silenced him. The aura of authority made him unquestioning. And this happens so often with all of us. We surrender our judgement too easily when someone speaks with confidence and also carries a title. Of course, this may have been a one-off case. In matters that are critical, we must always seek the guidance of a senior and experienced doctor. But the point remains that authority, when unquestioned, can sometimes cloud our ability to see clearly.
What my relative suffered from in his experience with the first doctor is what psychologists call Authority Bias, which isour tendency to trust or obey authority figures even when evidence suggests otherwise.
Weâre actually wired this way. For most of human history, authority meant survival. If the village elder warned against eating a certain berry, you obeyed. If the tribal chief said the river was unsafe to cross, you listened. Obedience created order, saved time, and prevented fatal mistakes. But in modern life, this instinct often misfires.
Stanley Milgram, a psychologist at Yale, captured this brilliantly in the early 1960s. He wanted to study how far people would go in obeying authority, even when it clashed with their conscience. Volunteers were told they were participating in a study on learning. Their task was to administer electric shocks to another participant (actually an actor) every time he answered a question incorrectly.
The shocks started mild at 15 volts, then 30, 45, and so on. But they escalated to dangerous levels, from 300 volts up to 450 volts, marked with warnings like âDanger: Severe Shock.â The actor screamed, begged, and eventually fell silent. Many participants pleaded to stop. But when urged by the experimenter in a white lab coat with phrases like, âThe experiment requires you to continue,â more than 65% of them went all the way to administering what they thought were lethal shocks.
The results were chilling. Ordinary people, not sadists or soldiers, were willing to harm others simply because authority instructed them to. Authority didnât just influence them, but it overrode their own judgment.
And Milgram wasnât alone in uncovering this weakness in human behaviour. Around the same time, Solomon Aschâs conformity experiments showed that people would knowingly give wrong answers to simple questions, just because everyone else in the group (planted actors) gave the wrong answer.
In Philip Zimbardoâs Stanford Prison Experiment, ordinary students assigned roles as âguardsâ began abusing their peers cast as âprisonersâ within days, simply because authority structures gave them that power.
The uncomfortable lesson across these studies is clear, which is that we humans are deeply susceptible to authority and social pressure. Even when the facts are clear, even when our conscience rebels, authority can silence us.
Now, place this insight into the world of investing. The lab coat is replaced by a star fund manager on a business channel, a brokerage report stamped with a big bankâs logo, or a charismatic CEO delivering grand promises. We investors, like Milgramâs volunteers, often suspend our doubts because an authority speaks with conviction.
Iâve seen this up close many times. For example, during Indiaâs infrastructure boom of 2006â2008, brokerage houses churned out reports filled with extremely optimistic numbers. Companies flaunted order books worth âš20,000 crore, âš30,000 crore. The government had announced trillion-rupee investment plans in highways, power, and airports. Stocks of companies in this space had already multiplied 200â300% in a few years, yet analysts confidently predicted another 100-200% upside.
The reports carried bold âBuyâ recommendations and target prices that made portfolios look like future gold mines. Investors, some of them being my friends and relatives, trusted them because they came from ârespectedâ institutions. By 2008, when global markets crashed, projects stalled, and debt spiralled, many of these stocks had lost more than 70-90%. The cracks were visible in the balance sheets all along, but authority had blinded us to them.
The same bias also shows up in how people chase mutual funds led by âstarâ managers. The halo effect makes investors assume past performance guaranteed future success. But even the best managers underperform, sometimes for years. Authority bias magnifies the disappointment because expectations were built not on process but on personality.
Now for the big question: Why do we even fall for it, again and again? The simple answer is: Because it feels safer.
Itâs easier to lose money alongside a famous name than to risk being wrong on your own. Trusting authority also offers a shortcut. And because of the halo effect, we assume success in one area means competence everywhere. A fund manager who picked a multibagger stock once must surely know the next one too.
But authority bias isnât just costly in terms of money. We also stop asking the most basic questions, like: What if this person is wrong? What are their incentives? Would I act the same way if this advice came from someone I didnât know?
The danger is obvious, and yet, rejecting all authority is equally dangerous. Iâve seen many investors swing to the opposite extreme. They try to do everything on their own, picking stocks without understanding businesses, and reacting emotionally to every rise and fall. In doing so, they expose themselves to even bigger mistakes. Many biases, in fact, hit us hardest when we try to navigate investing entirely alone.
The wiser path is not to reject authority, but to choose it wisely. A good financial advisor, for example, doesnât just tell you what to buy, but explains risks, listens to your goals, and holds you accountable to your process. A disciplined mutual fund manager doesnât promise certainty but builds a framework that withstands cycles. A trustworthy mentor admits what they donât know. These are the authorities worth leaning on.
Charlie Munger once said:
I never allow myself to have an opinion on anything that I donât know the opponent sideâs argument better than they do.
That is also a test for authority. Do they show you both sides of the argument? Do they admit uncertainty? Are their incentives aligned with yours? If yes, then their authority is earned, not imposed.
Behavioural research has shown repeatedly that we humans are poor at separating authority from truth. We confuse confidence with competence. But investing, like life, doesnât reward blind obedience. It rewards process, patience, and humility. The market doesnât care who you followed. It only cares about whether your reasoning held up.
So, the next time you find yourself nodding along to a persuasive fund manager, or feeling reassured by a glossy report, pause. Ask yourself: would I make the same decision if this advice came from an unknown person? And if I canât manage on my own, who is the right authority I can trust?
Authority bias will always tug at us. Itâs part of being human. But awareness gives us a chance to step back, to ask better questions, and to lean on authority where it is earned, not where it is merely projected.
Disclaimer: This article is published as part of a joint investor education initiative between Safal Niveshak and DSP Mutual Fund. All Mutual fund investors have to go through a one-time KYC (Know Your Customer) process. Investors should deal only with Registered Mutual Funds (âRMFâ). For more info on KYC, RMF & procedure to lodge/ redress any complaints, visit dspim.com/IEID. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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