So why is it exactly that we get caught up with ‘the crowd’? We are surrounded by people in our everyday lives – friends, family, colleagues and so on. We try to listen to our own intuition and our independent thoughts, but often we’re influenced by those around us – sometimes without realising. Another factor is the abundance of information readily available to us.
The first reason we agree with others comes down to the groupthink phenomenon. This is where we agree with others, or agree with a group because it’s easy and it feels right. Often, it feels logical and rational. Nobody likes people who disagree with everyone and everything all the time. This can be traced back throughout history as being something of a tribal quality. A classic groupthink scenario is when there are 10 people sitting together, and suddenly 9 jump up and run away. The 10th person won’t sit there wondering what’s going on, or what the danger might be. He or she will most likely jump and run too, and worry about the details later!
It’s the same in team sports – making decisions is a team responsibility and you make those decisions based on what’s best for the team. Or what seems best for the team, at least – and of course, like with many things, majority rules.
We recently had a client who was doing some routine exercise and climbing Castle Hill (a hill in Townsville that’s just 6 feet short of being called a mountain!) while having a conversation about finance with his walking buddies. Due to the market crash at the start of the COVID-19 pandemic, all of those people were selling their shares. They had seen the entire market crash by 37%, and they were sick of seeing their superannuation balance drop further and further – so they decided to move their money out of their super and into cash. Of course, they encouraged our client to do the same, without knowing his financial circumstances or what strategies would work best for him. And he must have known that because when he rang us for advice, straight away he started with, ‘I know this is probably the wrong decision, but…’ He also understood the nature of group momentum and the risk of agreeing with others. In any case, we are glad he called us before making any rash decisions.
Restraint bias is where people think they can restrain themselves from making certain decisions. They think they can be the exception to the rule and not fall into the group mentality mentioned above. It’s a little like having junk food in the house and thinking you won’t eat it. We know we certainly can’t! Some people claim that market volatility doesn’t worry them. But often, those same people check their super balance weekly or monthly and find it very difficult not to worry about it; and that can lead to a bad decision. It’s like when you think to yourself ‘okay, I won’t eat anything, I’ll just have a little peek in the fridge’. If you’re like us, you know where we are going with this one!
The fact is, we are all human, and we all make mistakes and are affected by things around us.
Restraint can be difficult. Everyone is going to make mistakes at some point – unless we remove those incentives or temptations.
And finally, we have something called neglect of probability. This is where we ignore the probability of an event occurring and focus only on the outcome. For instance, we look at somebody who has achieved something that we want to achieve ourselves, and we think ‘okay, I’ll just copy their actions and get the same result!’ It’s like borrowing $2 million and buying investment properties because someone else did that and made a lot of profit in doing so. But they might have bought a long time ago, in an area that has gone up greatly in value, or gotten a good deal on their purchases. There are so many factors – just because you copy an action, doesn’t mean you’ll get the same outcome. What we need to do is consider the actual probability of that outcome happening.
That brings us to the conclusion of this series – check out our first three podcasts on biases for more information (podcasts 136, 140 and 144).
Dallas Davison, Michael Hogue and Ali Hogue.