Do you remember when was the last time you checked out traveller/buyers reviews before booking any hotel or when you bought something online? You do it most of the time if not always, Right? After all if number of reviews is more it shows that this product has been bought by many others, and when those reviews are positive with above average rating, this gives confidence that those using it are happy with it.
You tend to download the app having more comparable number of downloads with other similar apps, or at least those apps which your friend circle is using (recommendations). If most of your friends have got I phone, how you can settle down to Micromax. You feel safe when your kids get into some engineering or Medical college, even if they want to study social sciences, after all this is what most kids do. When most of your colleagues have Sedan, you find uncomfortable owning a hatchback. When they go to Europe for holidays and you to Himachal, you feel that you are not growing in life.
Same way how many times have you invested in or shown interest in a Mutual fund or stock, just because that particular investment has generated good returns for your friend, colleague or family member? THINK
It happens with all. After all we are human beings and have some common behavioral issues. This particular behavioral phenomenon is known as Social proof or Herd behavior, which dictates that individuals feel they are behaving correctly when they act the same as other people. In other words if they are doing something opposite to what others are doing they feel uncomfortable and unsafe or left out.
Marketers know how to play with your mind. So when some sales person tells you that “next door Sharma Ji” has also bought this or invested in this, then to avoid the feeling of having left behind you also buy the same. Amazon tells you that “those who’ve bought “this” also have bought “that”, you were shown some ladies telling why they prefer Colgate over others, to make you feel that but still you feel that most of the housewives prefer Colgate for their kids. They bring someone with white coat to make you believe that you are getting recommendation from Doctor’s/Expert’s mouth. Celebrities/public figures endorsing brands give you a recall factor as some known face was promoting the same. All these are examples of promoting something with a “Social Proof”.
Why we need Social Proof?
Why do we act like this? Well, in the past following others or moving in herds is a good survival strategy. It provides a kind of sense of security from predators. To save one self from animal attacks or to plan to attack on animals for food, tribal need to move in groups. Those who acted differently from the group – exited the gene pool. We are the direct descendants of those who copied the others behavior. This pattern is so deeply rooted in us that we still use it today, even when it offers no survival advantage.
Social Proof and your Investments
Now think about your investments. You have a good allocation into equity, and suddenly you hear a bad news that is expected to lead to a big fall in the market tomorrow, at least this is what you’ve read in business papers and also on Cartoon Network of Business Channels (CNBC). Everyone around you got into panic and the first thing the next morning everyone wanted to come out of was equity investments.
How would you react? Would you also get panicky?
You want to buy residential property not because you need a house to live in, but because all your friends have already bought their houses. In fact they have 2 more which they have put on rent. Everyone around you is buying gold as they feel that this will never come down or is an ever growing investment, so you also get tempted to buy some.
I keep on getting queries on asking suggestions on “BEST SIP” with a long term time horizon. And Long term for them is of 3 years. On asking why they want SIP, they reply as that SIP is better tool than Recurring deposit and these days’ people prefer SIP more than any other investment, as this is what they’ve been reading everywhere. Without understanding that SIP is just a mode of investment and it doesn’t nullify the Risks prevalent in the market, even the risk averse investors wanted to have exposure into equity SIPs, even with short (long) term horizon.
If you were in stock markets in 2007-08, you must remember that highest equity allocation by retail investors was in 2007 i.e. when they saw everyone making money around them, and wanted to take advantage of “India’s growth story”.
How to avoid being Victim to Social Proof
Rather than following the principle of Buy low and sell high, you have a tendency of buying high and sell Low, as that is the time when you find other people are doing the same thing.
You are victim of your own behavior and looking for a Social proof is one of the cognitive biases. Sellers and even media play around with this behavior by creating excitement or sense of fear and greed through different articles and selling techniques. So to save yourself from getting missold and not reacting to their practices, you may follow the below mentioned ways.
- Know “WHY” –
Before falling in to any sales pitch or reacting to market news (Good/Bad) you need to understand the WHY behind it. WHY have you invested or should you invest/withdraw, in/from this product? Do you already have some goals where this product is getting fit in or this product made you realize that you need to have some goals, if latter is true than this is the time to work on your goals rather than making investments.
Before taking any action, answer this simple question: Is Investing or withdrawing from the investment a well thought of strategy and part of your long term plan, or you are just reacting to market movements, with no Asset allocation at place?
- Ask “WHY” –
When you are sure on your “WHY”, then now is the time to understand other people’s “WHY”. Now this is where you need to understand that this is none of your business to know what is happening in other people’s lives. Their reaction may be due to lot many reasons better known to them. You can only control your behavior and not theirs.
But yes, if you are being pitched by some sales person then you should better know WHY he is advising, what he is advising. And also WHY he is advising to you? WHY he feels that what he’s advising is a good advice for you.
Here you will find out that you will not get a sound advice from someone who is not aware about your financials, your goals, your requirements, and these are some things which can not be discussed with every tom, dick and harry
- Put yourself in a process through Financial Planning –
Putting yourself in a Process will eliminate most of the biases; provided that process is backed by properly structured financial plan which took into account your risk profile and aspirations.
I mean even SIP puts you into a process, but with the wrong understanding, having no hold on to cash flows and also with no plan at place, most of the SIPs dies young. So comprehensive financial plan is very important, which not only takes care of your investments and asset allocation, but also have a well-defined strategy towards your long and short term goals and answers all possible “What if” scenarios.
- Take help of Financial Planners:
You have to have a professional financial planner by your side. A human who understands human emotions, not a machine which do what you want it to do; a human who can counter your thoughts, understands the WHY behind your action and guide you on necessary steps.
It has been observed that in many situations, the best thing that one should do is to relax, sit quietly and wait for the mayhem or excitement to get over. Here investors get overpowered by their emotions and feel like they should do something like invest more or withdraw immediately. But a professional by your side can help you sail through these mood swings.
While we are free to choose our actions, we are not free to choose the consequences of our actions – Stephen R. Covey
Before saying – I’ll have what she’s having, ask yourself few questions. Decisions which others are taking with their investment may not be good for your financial health. Understand that you are a different person with different requirements.
Don’t let sellers take advantage of our weakness for social proof. Be skeptical whenever a company claims its product is better because it is the “most popular”.
You may buy a specific product based on other buyer’s review, but your purchasing decisions should not depend on what others are buying. Same goes with Investments. For spending be aware of your budget and for investment be aware of your financial plan.
It’s easy to stand with the crowd, it takes courage to stand alone. Do what you think is right for you and not what others are doing – Good Moneying.
Absolutely great article. After a long gap, read a short and crisp version of human / herd behaviour and its impact on a person’s life – more particular reference to financial life/health. Very easy to become a part of the “crowd” (in Hindi it is called “Bheed” – and I say that “Bheed me mat kho jana) – “don’t get lost in the crowd”.
It actually requires huge degree of knowledge, analysis, conviction – more of self-conviction and courage to ‘stand apart’ ( I have purposefully not used the word ‘stand alone’).
In fact you will get company of like minded people around you even if you ‘stand apart’.
I am glad that you liked the article kamal ji. Well regarding your using of word “Standing apart”, i do agree with you but don’t you think that by expecting “Like minded” people to join, is another way of looking for “Social acceptance”. 🙂
No. I don’t think that’s the purpose of having ‘like minded’ people around you.
The intention was to convey that once you start your own journey, people who believe in you, trust in you and probably follow your ideology / philosophy would become a part of your journey / pursuit voluntarily irrespective of whether you seek “social acceptance” or not. Giving support for a pursuit/objective is not “social acceptance”.
I agree. Giving Support is not a social acceptance, but still “Expecting” people to follow your ideology is somewhere one is seeking social acceptance. If you are standing apart and want to do different thing is fine, but standing apart and looking at people to accept your way of working is where this behavior anamoly gets in, What say?
Interesting article. Reminds me of R Power IPO.Where herd mentality was seen in the fullest.
Quite an apt example Rajiv. 🙂