Imagine yourself walking on the side of the road, pre-occupied with your next world changing idea and daydreaming about the possibility of money and fame it might bring to you. Suddenly a panicked group of strangers run past you as if they are being chased by something. What do you do?
Do you stop and then casually turn around to visually scan the area? Do you analyse the threat and then make a decision whether to follow the running crowd or just ignore them?
Well if you are a normal human being, chances are high that you would start running with the crowd and postpone the task of analysing the threat level.
Of course, the likelihood of a lion chasing you on a busy city street is miniscule. And at the same the chances are reasonable that the running crowd will suddenly turn around and start laughing at you and shouting “Bakraa!” (Hindi term for someone who got fooled)
You might end up looking like a fool but the “fight or flight” instinct endowed by nature prefers you to be alive and considered fool instead of being torn apart by a ferocious lion in the middle of the street. And for that matter, lions don’t give any specific concessions to rational humans.
As per Wikipedia, social proof is –
A psychological phenomenon where people assume the actions of others in an attempt to reflect correct behavior for a given situation. This effect is prominent in ambiguous social situations where people are unable to determine the appropriate mode of behavior, and is driven by the assumption that surrounding people possess more knowledge about the situation.
In short, monkey see, monkey do. That’s how you can explain the social proof tendency to your kids. Social proof, also known as herding, is a terribly useful mental model from psychology. So let’s dig deeper.
Humans are social animals. We want what others want and we tend to avoid what others avoid. When we’re uncertain, in an unfamiliar environment, we try to resolve the ambiguity by following others
In the hunter gatherer environment, if you saw a group of panic struck homo sapiens running past you, the obvious conclusion was that they were being chased by a ferocious lion. It gave you a tremendous evolutionary advantage if you started following the herd behaviour under such circumstances. So that’s how the social proof tendency has been wired in human behaviour.
In fact, many psychological experiments on human beings have proved that the force social proof exerts on cognition is pretty strong.
Although we don’t live in the hunter gatherer environment anymore, it still makes our lives seemingly easier if we just stay in the herd. Being part of the majority acts as a protection from criticism. If we’re wrong and everybody else is wrong too, we get blamed less.
Benefits of Social Proof
It would be unfair to say that every social proof situation is bad. As we have seen that social proof tendency, like many other behavioural biases, came into human behaviour because of evolutionary reasons so it must have utility in carrying out routine activities.
We see this helping us in our daily lives. From our selection of books at Amazon to relying on other people’s experience with a particular seller on eBay, we rely on other people’s decisions to make our own.
Most of the times, these decisions are good and extremely helpful. In fact, in his wonderful work, The Wisdom of Crowd, James Surowiecki argues convincingly that the quality of decisions taken by a group is usually better than the one that a single member of group will make.
In fact, e-commerce and social networking websites spend a lot of efforts in developing strong recommendation engines which are primarily based on the idea of social proof i.e., figuring out the most popular products (or online content). These social proof based recommendations help us discover the right products.
Herding becomes particularly useful in ambiguous situations. It makes our lives easier and our decisions simple.
So there is nothing wrong in making small decisions based on social proof. It actually saves you a lot of time and energy.
Social proof can be a wonderful tool for nudging people to adopt good behaviour and follow best practices. In the book, Yes! 50 Scientifically Proven Ways to Be Persuasive, the authors describe an interesting experiment which was conducted in a hotel to promote recycling of used towels by the hotel guests.
The researchers placed a message indicating that the majority of guests already chose to reuse their towels. Guests whose cards subtly employed the principle of social proof were 26% more likely to recycle their towels than those who saw only the basic environmental protection message. That’s a big improvement at no additional cost to the hotel.
When it comes to making crucial decisions, you have to take a step back and think for yourself. And when you fail to do that you not only miss tremendous opportunities but can often get into serious troubles. This is the dark side of social proof.
My Tryst with Social Proof
Let me share a true incident.
It happened when I was travelling from Bangalore to Chennai to attend Vishal’s investing workshop early this year. Bangalore airport is pretty crowded, especially during the early mornings. Probably because early morning flights are cheap so everybody travels during that time.
Have you noticed when you’re running late and worried about missing your flight, a fellow called Mr. Murphy shows up with a live demo for his law called Murphy’s Law? I think you can guess what was about to happen with me.
The queue where I was standing was moving the slowest. To add insult to an injury, the gentleman standing in front of me got little distracted and didn’t realize that the queue had moved ahead. Now the people standing behind me got impatient and started over-taking both of us, effectively dishonouring the queue etiquette.
What did I do? Instead of doing what was right, i.e., asking the gentleman to move ahead, I gave in to the force of social proof and started moving ahead with others. In that very instant the gentleman’s trance was broken and he caught me red handed while I was overtaking him. Naturally he wasn’t very pleased and threw few nasty remarks at me for breaking the Indian-queue-protocol.
But what surprised me was the excuse that I gave him. I innocently told him, “Everybody was moving ahead so I also moved!” As if the Indian government has recently passed social proof as a new law to justify any excuse.
I was little embarrassed of my behaviour especially after having read about social proof so many times in the past. It’s very difficult to overcome these behavioural biases even if you know about them. That’s why it’s suggested that you should worry about them consciously only when the stakes are high.
Dark Side of Social Proof
Routinely, it’s pretty much safe, even efficient, to follow others. However, it can have dangerous consequences when the stakes are high. It won’t be an overstatement if I say that social proof has the potential to cost you your life.
Lemmings are known for jumping off the cliff in large groups but it’s scary to know that herd behaviour can drive even humans to commit dangerously foolish acts.
In 1978, under a strong spell of social proof bias, more than nine hundred followers of the cult leader Jim Jones and his organization committed mass suicide.
As far as human behaviour is concerned, German-Swiss philosopher Friedrich Nietzsche was accurate in his observation when he said –
Madness is rare thing in individuals – but in groups, parties, peoples, and ages it is the rule.
Skilled marketing people are experts in persuasion techniques and adept at exploiting such behavioural biases to shove their products down the customer’s throat.
Social proof is what is at work in canned laughter – what you hear in comedy shows. The reason such laughter exists is because it causes the audience to laugh longer and more often when humorous material is presented and to rate the material as funnier.
In fact, you will hear the laughter even when there’s nothing to laugh about. I propose they add such laughter to business channels as well, so that people stressed hearing the experts can get a few laughs!
Social Proof in Business and Investing
It’s sad but most investors and money managers are plagued by ill effects of social proof. Warren Buffett’s comments prove this –
Most managers have very little incentive to make the “intelligent but with some chance of looking like an idiot” decision. Their personal gain/loss ratio is too obvious: if an unconventional decision works out well, they get a pat on the back and, if it works out poorly, they get a pink slip. (Failing conventionally is the route to go; as a group, lemmings may have a rotten image, but no individual lemming has ever received bad press.)
If you start analysing the portfolios of majority of mutual fund managers, you will discover that they’re very similar or differ only minutely and very rarely we observe any manager taking a very big and ‘against the consensus’ call. It’s no surprise that their returns are also not much different.
John Maynard Keynes, one of the most influential economists of the 20th century, captured this tendency with a sarcastic comment –
Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.
A lot of retail investors also exhibit social proof in their investment decisions. They hold a particular stock because most of the people in their ‘investing groups’ are positive on that stock. This act of mindless copying also leads to mindless selling in tough times because it’s difficult to buy with ‘conviction’ in tough times (and at low prices) when there is no knowledge base to get that ‘conviction’ at the very first place.
Overcoming Social Proof
One of the best ways to brace yourself from being a victim of social proof is to choose your role models carefully. Your heroes can serve as reference points for making a decision about our own behaviour.
Guy Spier, author of the book The Education of a Value Investor, shares a wonderful strategy in his book –
There is a wisdom here that goes far beyond the narrow world of investing. What I’m about to tell you may be the single most important secret I have discovered in all my decades of studying and stumbling…What I stumbled upon was this. Desperate to figure out how to lead a life that was more like his [Warren Buffett], I began constantly to ask myself one simple question: “What would Warren Buffett do if he were in my shoes?”…The minute I started mirroring Buffett, my life changed. It was as if I had tuned in to a different frequency.
So find out your heroes and populate your thoughts with them.
For the second strategy to counter the force of social proof, let’s take Mark Twain’s help who said –
Whenever you find yourself on the side of the majority, it is time to pause and reflect.
Mr. Twain is essentially asking us to become an independent and rational thinker. Both Charlie Munger and Warren Buffett are ruthlessly independent in their thought process and decision making.
Taking a contrarian position isn’t an iron rule. Don’t take pride in being contrarian just for the sake of it. Warren Buffett simplifies it further –
We derive no comfort because important people, vocal people, or great numbers of people agree with us. Nor do we derive comfort if they don’t.
Would you sell your brand new car if some of your neighbours came to you and offered you 30% less than your purchase price? Of course not! You know the real worth of your car and selling it, just because the herd thinks it’s deteriorated in value, isn’t a wise decision. So why would you do that with you stocks? Don’t fall for the conventional wisdom of “the trend is your friend.”
Benjamin Graham, the highest authority on security analysis, reminds us –
You’re neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.
Checklist is another great tool to save you from the social proof tendency. The catch is that you have to create the checklist beforehand. When the whole world (crowd) is stampeding in one direction, checklists can bring some sanity in your decision making process. For that matter, a checklist saves you from hosts of other behavioural biases also, like hindsight bias, anchoring, confirmation bias, and liking tendency.
Keep in Mind
Here are some final words of advice from Peter Bevelin’s Seeking Wisdom on how to get over the social proof tendency…
• The 19th Century American poet Ralph Waldo Emerson said: “It is easy in the world to live after the world’s opinion; it is easy in solitude to live after our own; but the great man is he who in the midst of the crowd keeps with perfect sweetness the independence of solitude.”
• Disregard what others are doing and think for yourself. Ask: Does this make sense? Remember the advice from Benjamin Graham, the dean of financial analysis – “Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgment is sound, act on it – even though others may hesitate or differ. You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”
Basically, if you want to be successful in investing, you got to form your own independent opinions. Learn from vicarious experiences, for that will save a lot of money