Imagine it’s Friday evening, the beginning of a long weekend, and you decide to watch the latest action flick in your nearest multiplex. Since you don’t want to miss the beginning of the movie, you decide to take the elevator as soon as you reach the mall. Although the health freak inside you is mad because you promised him to always take the stairs in a mall.
The moment you enter the elevator, you notice that there are half a dozen other people inside but strangely everybody is facing towards the back of the elevator. Isn’t that odd? So what would you do in this situation?
Can you guess what most people do in such situation? Watch this video of a social experiment which tried to capture people’s reaction in the similar situation.
Most people fall for this and blindly copy the actions of others without resisting or questioning. They assume that if everybody is doing it, there must be some reason for it. They fear looking like an odd man out. This tendency is called Social Proof.
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.
But why is it so? Why do we follow the herd? To answer that you’ll have to cross the boundaries of psychology and step into the discipline of biology. Darwin’s Theory of Evolution give us some clues.
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, and perhaps hungry, beast. 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.
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 his wonderful work, The Wisdom of Crowds, 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 because it simplifies the decision making process.
So there is nothing wrong in making small decisions based on social proof. It actually makes our lives easier and saves 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, 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 card 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.
How To Offend your Fellow Passenger
It happened when I was travelling from Bangalore to Chennai to attend Vishal’s investing workshop.
Thanks to a gentleman called Mr. Murphy (who postulated Murphy’s law), the flight checkin 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 offered few nasty remarks 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!”
I was little embarrassed of my behaviour especially after having read about social proof so many times in the past. But that’s the irony with behavioural biases. It’s very difficult to overcome their effect 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. Else you’ll get exhausted by guarding yourself all the time from social proof.
The 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.
The story of lemmings jumping off the cliff in large groups may be apocryphal but it’s scary when the herd behaviour drives 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 Investing
It’s sad but most of the financial industry is 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 the 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 economist of 20th century, captured this tendency with a sarcastic comment:
Wordly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.
A lot of 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 a 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 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:
“here 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 started offering 30 percent less than your purchase price? Of course not. You know the real worth of your car and selling it at a price quoted by Mr. Neighbour (a close cousin of Mr. Market) isn’t a wise decision. So why would you do that with you stocks?
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 yourself from social proof tendency. The catch is that you have to create the checklist beforehand. When the whole world (crowd) is stampeding in one direction, checklist can bring some sanity in your decision making process. For that matter, checklist saves you from hosts of other behavioural biases also like hindsight bias, anchoring, confirmation bias, liking tendency, etc.
And last but not the least, tune out the unnecessary noise i.e. the newspapers and news channels. More than any real information they just resound the “market sentiments” which is nothing but herding. Just because somebody is on the TV, who is articulate and wears a business suit, doesn’t mean he is a superior thinker and has valuable insights.
Conformity often results from uncertainty. In situations where we aren’t sure what to do, we conform to popular choice. But when the stakes are high, you don’t want to be in a situation where you’re unsure because that would trigger the force of herding.
Becoming an independent thinker may not earn you popularity but it surely will make you wealthy over long term.
So far we have looked at about thirty mental models from various disciplines. Teaching is a nice hack for learning and my own understanding has improved a lot while teaching these mental models.
A wise man once said, “The school education will help you earn a living, but self-education will make you a fortune.”
I don’t feel that there is something evil with traditional education systems but it looks like a series of hurdles that one needs to jump to achieve something in life. They are pretty good in doing what they were originally designed to do – to mass produce skilled workers who would become very efficient cogs in the wheel.
But once you realize the limitation of such education, you will naturally gravitate towards the idea of self-education.
Self education starts the day when you start designing your own study curriculum. A curriculum which doesn’t get over in few semesters; there are no grades (except the one you award yourself) and no project submission deadlines (excluding the ones you set for yourself).
Vishal and I don’t work with deadlines. We set live-lines. It’s the time we give ourselves to inject life into our work. Live-line sounds much more exciting than deadline. The quest for multidisciplinary learning is serious but not dead-serious.
Charlie Munger demands for multidisciplinary worldly wisdom. His prescription for seekers is to start by learning the big ideas from the big disciplines. And self education is the only way through to become little wiser to deal with worldly affairs.
If you’ve been following the Latticework series, I would say you’re already on the right track to acquire the worldly wisdom.
Take care and keep learning.