Jane Smith is a smart young woman. studying advanced mathematics at university. As she walks to the lecture room one bright morning, she is unaware that within half an hour, she will become part of an experiment. She and her fellow students take their seats as Professor Smart begins his lecture; a few minutes in, he writes a formula on the whiteboard and, one by one, asks the eight present for the answer.
‘Two thousand and thirty-five’, says student one; same says student two – and so on, along the row, until they reach Jane. She’s smart, she knows the answer is 2,050 – but, surely her clever fellow-students can’t be that wrong. So, she too gives her answer as 2,035.
Jane was part of an experiment to see how peer pressure can create ‘conformity’ when making a decision. As her fellow students were all actors, it can be very great indeed.
When in the company of others, we are all witness to what has become called ‘group-think’; we have all been in meetings and experienced the ‘echo-chamber’ effect, wherein one or more attendees will voice an opinion or state ‘a fact’ with which we might not agree, yet, in order not to rock the boat, we might choose to ‘go along’.
As a behavioural trait, this is the ‘conformity effect’, and it can be most injurious to wealth.
The investment community is rife with those who (nudge, nudge) have a good tip – and there are many who will line up to go along with the recommendation. Steer clear.
However, if your approach to investing is to rely upon deep, objective research of every security in your portfolio – and if you value impartial judgment, then you’re probably on safe ground. Be alert to the wisdom.
Key Points
Professor Solomon Asch (Swarthmore College, Rutgers University, University of Pennsylvania) believed many intelligent people are swayed by peer pressure.
The cards used in the experiments
To test his thesis, he created experiments using cards similar to those illustrated.
Usually in an academic setting, he used actors in the role of students while introducing a genuine student into the mix, of, typically, eight attendees.
The actors would be instructed to answer that the line in the card on the left was the same length as line B on the right; notwithstanding that the genuine student might ‘know’ that C was correct, sh/e went along with the fiction in 30% of cases. A remarkable result when the true answer was so obvious.
Bearing in mind that most experiments were done using real students, it’s not hard to believe that the percentage might well be higher in the general population.
The worst loss for a student might be a little humiliation – for an investor, such conformity might be extremely costly.
Disclaimer & General Advice Warning
This publication has been prepared by Joseph Palmer & Sons (ABN 29 548 490 818) an Australian Financial Services Licensee (AFSL 247067). Whilst the information contained in this publication has been prepared with all reasonable care from sources, which Joseph Palmer & Sons believes are reliable, no responsibility or liability is accepted by Joseph Palmer & Sons for any errors or omissions or misstatements however caused. Any opinions, forecasts or recommendations reflects the judgment and assumptions of Joseph Palmer & Sons as at the date of publication and may change without notice. Joseph Palmer & Sons, their officers, agents and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law. This publication is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Any securities recommendation contained in this publication is unsolicited general information only. Joseph Palmer & Sons are not aware that any recipient intends to rely on this publication and are not aware of the manner in which a recipient intends to use it. In preparing our information, it is not possible to take into consideration the investment objectives, financial situation or particular needs of any individual recipient. Investors must obtain individual financial advice from their investment advisor to determine whether recommendations contained in this publication are appropriate to their personal investment objectives, financial situation or particular needs before acting on any such recommendations.
| Author | Eddie Lees |
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