Social Proof Bias – Everybody else is doing it


Social Proof Bias

Social proof, also known as informational social influence, 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. The effects of social influence can be seen in the tendency of large groups to conform to choices which may be either correct or mistaken, a phenomenon sometimes referred to as herd behavior.

http://en.wikipedia.org/wiki/Social_proof

If a person is in a situation where they are unable to make a decision, they will usually check for how others are behaving and fill tend to follow their decisions. They think others are better than them and hence would feel secure to follow their behaviour. When everyone else behaves in a same way then social proof bias is aggravated.

Social Proof Bias in our day to day lives:

  1. Investors in a crisis situation, for ex., during a bear market phase would like to follow the herd and make decisions accordingly. If many people are selling, they will also sell their holdings, even if booking losses.
  2. Giving a Like status for a message in social media networks, just because, our friends have given a Like.
  3. Checking online for reviews and deciding on the restaurant which has got the most positive reviews.
  4. Following the experts’ advice or peers’ decisions in investing.
  5. Advertisements when claim they have served a million people, others may take their product or service.
  6. Following our friends or relatives for a vacation spot.
  7. Can you stick to your portfolio when everyone else claims the market is about to go in recession?

Avoiding social proof bias

  1. Filter the news and information and take only the ones that is necessary
  2. Ignore the big hue and cry or joy and greed, and look at things objectively, keeping emotions aside.
  3. Ask yourself if the decision you are about to make is only after proper analysis, or are you just following someone else

My experience with Social Proof Bias

During my early days of investing, I have made several investments in stocks just because my friends have made, fortunately few of them gave good returns, and most of them were loss making. Even during 2007-08, I have invested in an IPO, which most of my friends also subscribed.

“Where all think alike, no one thinks very much.” — Walter Lippmann
The five most dangerous words in business are: “Everybody else is doing it.” — Warren Buffett

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Filed under Behavioural Finance

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