You think for yourself every day, so your decisions are your own, right? Of course they are! You wouldn’t be you without the decisions you’ve made in your life. So you may be surprised to find out that your decisions have never truly been entirely your own. Your friends and colleagues influence your decisions without you even realizing it due to cognitive biases that we all live with. Your peers may be influencing your investments much more than you think.
Your Friends Aren’t Omniscient
Advertisers have long known about the power of the bandwagon effect. They are able to persuade people to purchase their products by appealing to the crowd. This first hit home with me during my sophomore year of high school where I learned about journalism methods. We learned of the bias’s potential moral implications and its use in the media. And of course, the old adage “If your friends jump off a cliff, are you going to do it too?” was thrown around.
It wasn’t until years later that I learned that this effect is not only something you spot in marketing, but it’s also a cognitive bias that runs much deeper than “everyone’s doing it, so you should too.” I think we can all agree that nobody on this Earth is omniscient. Then why do people act like their friends and peers seem to know so much more than an average person?
Sure, you don’t believe your friends 100% of the time, but that’s not the point. The problem is that you do believe your friends much more often than strangers. What if you read on the internet that your favorite food is actually terrible for your health and that you shouldn’t eat it anymore? You’ll most likely question the writer’s sources, maybe do additional research on it. What if your good friend tells you the same information instead? Well, time to find a new favorite food! You are much more likely to believe information coming from a trustworthy source. You may not even question them and spread the information to your other friends.
They don’t even have to be your close friends to fall victim to this bias. Imagine talking over the watercooler with a few coworkers when Joe suggests a particular stock to the group. Joe said he bought it recently and it’s gone up 18% since with more room to grow still! Even Nancy agrees she has heard about its potential. You jump on the opportunity, of course, and buy-in before it rises anymore.
But what if you weren’t a part of the conversation? Imagine you’re at the grocery store and overhear a couple of people talking about their recent investments. You will probably ignore it. Maybe you’d be nosy enough to look into the stock, but there would definitely be more research before making a purchase. After all, you don’t know these people.
The difference between how people react to information from their peers versus a stranger can be quite concerning. If the average person has average knowledge, wouldn’t it be safe to say the people we are surrounded by are more often than not, average? Knowing that there are exceptions to the standard, who’s to say Joe is more educated on the subject than the person at the grocery store? The people you do know, don’t know more than people you don’t know.
Question everyone, especially your friends. Playing Devil’s Advocate is a great way to deepen a conversation and make sure the sources are accurate. If they can’t answer your questions, put it upon yourself to find the answers. If you keep an inquisitive mindset for everything that you learn, you can help avoid this bias with your friends.
Your Friends Make Losing Feel Okay
We connect better to people who have been in similar situations as us, especially if they are negative experiences. It’s nice to be comforted when you make a mistake, but is it helpful? Imagine you and your friends Adam and Beth invest in a stock at the same time. Adam and Beth both sell their shares a couple of weeks before you and come out with a decent profit. You see the potential for more growth, so you hold. But the stock declines and never fully recovers. You sell at a loss and instantly feel regret for not joining them.
Now imagine if Adam sells early, but you and Beth opt for the long game. Now that you both are in the same boat, it doesn’t seem that bad. You feel a bit of regret that you didn’t side with Adam, but now you can fall back with Beth because you weren’t the only one to make the wrong choice. Not only that, but the majority made the wrong choice, so maybe it wasn’t necessarily a bad choice! You feel a lot better, but this is very flawed thinking.
All for One and One For All
The first problem is that at this rate, you’re never going to learn. With the first scenario, you may decide that next time you’ll do a little bit more research so you don’t repeat the same results.
With the bandwagon bias taking hold in the second scenario, the likelihood of you replicating the same results is much higher. You didn’t really feel the negative emotions that motivated you in the first scenario to do better. You are content with being mediocre with your friends because you’re in it together. This is a dangerous position to be in that will prevent you from succeeding.
Validation From Your Peers
It’s human nature to keep people around whom you agree with. You love feeling validated. Who doesn’t? To know that someone else agrees with your thought, thinks the same way as you; it’s a great feeling. Similar perspectives and experiences between two people create an instant connection which everyone is searching for. But agreeing with everything is unproductive and detrimental to success. Confirmation from your friends will not help you grow, and it can cause false information to take over sound reasoning.
Confirmation bias is when someone interprets a situation based on their prior beliefs instead of taking the information at face value. This flawed way of thinking can be practically unavoidable, especially within friend groups. If your friends are agreeable or think too similarly to you, you may want to rethink whom you’re spending your time with.
Keep Your Enemies Closer
Choose your friends wisely. The more diverse everyone’s experiences are, the more perspectives there can be in the group. And maybe it’s best not to have a people-pleaser around as often. Find an antagonistic or competitive companion to keep you on your toes rather than agree with everything you say. Friend’s can make you feel great, but keeping your enemy around can make you be great.
If you were to fact-check a stranger’s information, then you should fact-check your friends too. Most people are naturally trusting when information is coming straight from another person. Just make sure you do your research.
The market moves because of people and how they react. If you know how the majority typically reacts, you can make better predictions of the market.
If you’re looking to invest, Raposa can help you make the most profitable decisions by helping you divorce your emotions from your investments. By relying on systematic strategies you can reduce the impact of the bandwagon effect in your trading. Tune out friends and talking heads by following the system and the rules that you devised and tested.
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