Investing Psychology: The Effects of Behavioral Finance on Investment Choice and Bias, + Website

CHAPTER 4

Social Finance

Once we've disentangled the complex interaction between situation and disposition we will be ready to face the next set of challenges. Situation is one aspect of our environment, but there is another one, one that we're so immersed in we hardly recognize it at all.

Humans are social creatures, we rely on our social relationships and social networks to function properly, and we're so embedded in these that we react to the behavior of other people in entirely unconscious ways. And, of course, these ways are generally not going to make us wealthier than we already are.

Our tour, folks, is entering the land of social finance, where what your neighbor, your friend—even your unmet Facebook friend—and your family does is far more important to your investing decision making than anything you analyze in your own head.

CONFORM—OR DIE

The British Prime Minister Margaret Thatcher once opined that there was “no such thing as society,” but we can be fairly sure that she was wrong. We are totally and utterly immersed in our societies, to an extent that's astonishing once you start trying to unpick it. Our behaviors are conditioned by the expectations of the people around us, and we respond to those expectations by, largely, seeking to conform.

As we saw in Chapter 3, the idea of the wisdom of crowds doesn't tend to apply to investing situations because people's decision-making processes are often linked, sometimes in surprisingly obscure ways. But you'll also find people ...