Saturday Serendipity
Quote, Mental Model, Interesting find.
Hi there!
Reading time: About 4 Minutes
Quote
“It is better to remain silent at the risk of being thought a fool, than to talk and remove all doubt of it.” - Maurice Switzer
Mental Model
Social Proof
I wanted to go and buy a few clothes as I was in need of a few of them. When I went to the shop to buy myself clothes all the ones that ‘i liked’ were either what everyone was wearing nowadays or saw someone wear it and I wanted to buy it. This is mimetic desire as well as social proof. Whatever the crowd desired is what I ended up desiring. I thought the desire is all me but what drives my desire is other people.
Cialdini in his book Influence says perfectly,
“One means we use to determine what is correct is to find out what other people think is correct. We view a behavior as more correct in a given situation to the degree that we see others performing it.”
A great example that I have in mind is the story of the frozen lake.
A boy sees a frozen deep lake and wants to skate on it. His friend who is terrified tells him not to but he is ignored.He decides to take the risk and he skates on it smoothly, three people see this and the other who is hesitant decides to skate on the lake. Now four people are skating on the deep frozen lake. Four more people see it and join in thinking so many people are skating it is safe. Now guess what the person who was absolutely terrified joins in. The ice cracks and everyone falls. As more people joined in the risk increased but everyone thought it is safer because there are more people.
Another amazing story is the story of the Arizona Petrified Forest:
A classic example of social proof occurred in the Arizona Petrified Forest. The theft of unusual petrified wood by visitors was becoming a serious issue, depleting the ancient woodland. Staff put up a sign stating: ‘Many past visitors have removed the petrified wood from the park, destroying the natural state of the Petrified Forest.’ This was intended to deter theft, but it had the opposite effect. The depletion of the petrified wood tripled. Experts who looked at the case determined that the signs had served as social proof, making people feel the act was justified. (Farnam Street)
This story also falls as unintended consequences.
Marketing
Marketers love to use social proof. They use influencers and other ad campaigns to make their product seem to be used by everyone. Red Bull had a very successful and unique marketing strategy of putting empty trash cans of red bull everywhere so it seems like everyone drinks it. This made people think everyone is drinking it when in reality nobody was. This way Red Bull used social proof to market their drink.
In Investing
Social Proof is a bias that we humans face in everything. But let’s focus on investing for a second. As an investor social proof is very dangerous. The mutual fund managers that invest rarely have very different portfolios. They believe that they cannot go wrong if their competitor is also holding the same stock. What they do not realise is that they could both lose money. Keynes captured it well when he said,
“It is better for reputation to fail collectively than to succeed unconventionally.”
As a retail investor we tend to stick with the crowd’s sentiment. When the markets are doing well we stay optimistic and when the markets are doing bad we stay pessimistic. As an investor though we know that we want to buy great businesses at a fair price. This fair price does not come when everyone is optimistic.
A lot of retail investors create investing groups or follow all their favourite investors and they just end up buying the same things thinking they cannot fail.
Conclusion
This bias is a very hard one to battle against. You have to aim to be a contrarian but remember just because you have an opinion which is not agreeing with the crowd you are not right.
“You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.” ~ Benjamin Graham
We have to aim to think independently and also make sure that our reasoning is right. Blindly being contrarian does not always work.
Interesting Find
10 things learnt from Peter Bevelin's book
That’s it for this week!
Hope you have a great weekend!
Good topic