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3 Harmful Effects From Social Pressure On Our Investing

Humans are inherently social creatures and we love to mingle, chat, and share good stories. However, when it comes to investing, social pressure can be very pernicious on our psychology, which may lead investors to take mental shortcuts that result in flawed conclusions. This is because as humans, we tend to take cues from people close to us or who we respect, and this acts as a mental shortcut for making decisions.

In this article, I discuss three effects which social pressure can have on our investment process:

Dangers of groupthink

Investopedia defines groupthink as such:

“Groupthink is a phenomenon developed in groups marked by the consensus of opinion without critical reasoning or evaluation of consequences or alternatives.”

Groupthink tends to suppress individual expression and logical, critical reasoning. The main reason for agreeing to a group-consensus is not to upset the balance or harmony within the group by voicing an opinion which is different. Hence, if the group agrees on an investment idea but their logic is flawed, no one may dare to raise the alarm for fear of disrupting the consensus and unwittingly drawing attention to themselves.

Pressure to conform

We may feel pressured to conform to the ideas and suggestions of the group even if we do voice out a differing opinion, as the social influence of the group comes into play. In cases when someone speaks out against groupthink, the rest of the group may choose to ignore the lone voice and coerce the dissenting person into agreeing with the consensus. It has been shown in experiments that people who are subjected to erroneous observations by the group and who notice the errors, tend to alter their stance to conform to the errors, rather than sticking to what they believe is true and accurate.

In investing, this pressure to conform may make us invest in what’s popular, rather than what’s suitable for our own risk appetite and abilities.

Self-censorship

Self-censorship is the act of stopping ourselves from saying anything which may offend others. This can be severe to the point where we filter out what’s perceived to be wrong, leading to sanitized statements. In investing, this would be detrimental to proper decision-making as it means only politically correct statements are made, the result being that an investing argument may be biased and skewed.

Foolish Bottom-Line

As can be seen above, social pressure can have serious negative effects on investors. Therefore, we should always be wary of social pressure and its pervasive influence on our thought processes.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.