The Psychology Of Human Misjudgment Part IV by Sanjay Bakshi, via Slide Share
Bias # 5: Social Proof
Which line on the right do you think is the same size as the line on the left?
Seth Klarman Tells His Investors: Central Banks Are Treating Investors Like “Foolish Children”
"Surreal doesn't even begin to describe this moment," Seth Klarman noted in his second-quarter letter to the Baupost Group investors. Commenting on the market developments over the past six months, the value investor stated that events, which would typically occur over an extended time frame, had been compressed into just a few months. He noted Read More
Safety in Numbers
Video on “safety in numbers”
Birds of a feather ?ock together…Evolution programmed “social proof” in us. It gave us a survival advantage…
Social proof most influential under two conditions
Uncertainty and doubt – when people are unsure, when the situation is ambiguous, they are more likely to copy others
Testimonials from “similar others”
Persuasion very effective if it comes from peers People follow lead of “similar others”
Amazon.com uses data analytic to identify “similar Others”
Hardwired to herd
Real pain and social pain are felt in the same parts of the brain.
Chandler would make a good investor.
Being a successful investor requires not feeling any social pain by doing something thats very unpopular…
We can get more wiser or more foolish by following the crowd…
When does the wisdom of the crowds becomes madness of the mobs?
There are domains where one is better off relying on the crowd
Wisdom of Crowds as Social Proof
For me, its very useful to quickly zoom into the 10 most emailed articles on NYT.
So, when it comes to reading news in NYT, I rely on the “wisdom of the crowds”
In some domains wisdom of crowds works. In some (like ?nancial markets)it doesn’t.
“If you want to have a better performance than the crowd, you must do things differently from the crowd.”
But when it comes to investing, you are on a VERY different terrain…
“People are always asking me where is the outlook good, but that’s the wrong question… “The right question is:Where is the outlook the most miserable? I call this the Principle of Maximum Pessimism… “Let me explain how it works. In almost every activity of normal life people try to go where the outlook is the best… “You look for a job in an industry with a good future, or build a factory where prospects are best. But my contention is if you are selecting publicly traded investments, you have to do the opposite… “You’re trying to buy a share at the lowest possible price in relation to what that corporation is worth… “And there is only one reason a share goes to a bargain price: Because other people are selling. There is no other reason… “To get a bargain price, you’ve got to look for where the public is most frightened and pessimistic.”
Reversion to the mean
“You pay a very high price in the stock market for a cheery consensus.”
“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 all 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…
“John Maynard Keynes said in his masterful The General Theory: “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.” (Or, to put it in less elegant terms,lemmings as a class may be derided but never does an individual lemming get criticized.)”
Social Proof + Incentive Caused Bias
See full slides below.