Social Proof and Herd Psychology — Because Everyone Else Is Doing It
An empty restaurant or one with a line — which do you walk into? Most people choose the one with a line. This feeling that 'there must be a reason everyone's doing it' is social proof.
What Social Proof Is
Social proof is the psychology of treating what the majority does as the correct answer and copying it when you're unsure what is right.
The psychologist Robert Cialdini organized it as one of the core principles of persuasion. The more uncertain the information and the harder the judgment — and the more that people similar to you are doing it — the stronger this force becomes. In most situations it's a useful shortcut, but when the majority is wrong, it makes you wrong along with them.
Asch's Conformity Experiment
A classic that demonstrated the power of social proof is the psychologist Solomon Asch's conformity experiment (1950s).
Participants were asked which line matched a reference line in length — a question with an obvious answer. But when confederates who were in on it deliberately gave a wrong answer with confidence, a large share of the real participants followed the wrong majority instead of the answer they could see with their own eyes.
According to reports, in the critical trials about 37% of responses followed the wrong majority, and about 75% of participants conformed at least once. Even in the face of an obvious fact, the pressure of the majority worked this powerfully.
The lesson of the Asch experiment is that even a 'wrong majority' can sway us. All the more, in investing where the correct answer is unclear, the pull to follow the crowd is far stronger.
Investment Herd Psychology and Its Price
The mindset of 'everyone's buying, so I will too' is the fuel of bubbles. Seeing others rush in makes you feel 'they must know something,' so you jump on late; when others sell, you throw your holdings out too.
The problem is that the crowd is usually hottest near the top and most terrified near the bottom. So following the crowd easily traps you in a pattern of buying high and selling low — a scene repeated throughout history in major bubbles and crashes.
The defense is to not treat 'everyone's doing it' as your reason. If you have your own reason for holding an asset and set your own standards in advance (asset allocation rules, a manageable drawdown) independent of the crowd's excitement and fear, you can reduce how much you get swept along.
Frequently Asked Questions
Q. Are social proof and herding the same thing?
They're closely related. Social proof is the 'psychological cause that makes people follow others,' while herding is the resulting 'market phenomenon' in which the majority rushes in the same direction. In other words, social proof is the driver at the individual level, and herding is how it appears at the level of the whole market.
Q. So should I ignore other people's opinions?
You don't need to ignore them — the majority's judgment is often useful information. The key is not to treat the mere fact that 'everyone's doing it' as your final basis. Check for yourself why, and especially when excitement or fear runs to extremes, keep some distance from the crowd and review it against your own standards.
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