There are many investment websites where private investors and market professionals discuss potential investment ideas. Seeking Alpha, The Motley Fool, Stockopedia and ADVFN are just a few of the ones I regularly read. They can often be a fantastic source of knowledge, wisdom and experience as contributors from all walks of life freely discuss their investment ideas and strategies. When you add in Blogs & Twitter there are a myriad of ways to read or share investment ideas. While there are undoubtedly some misleading contributions from people who manipulate information for their own ends, in my experience most people who post do so out of a genuine desire to gain and share knowledge. And experience teaches you to spot those whose opinion could be questionable.
So why do I think discussion boards have the power to lead us to poor investment decisions? Primarily because contributors to these sites make very public statements about their opinions and psychology teaches us that once we’ve done that we find it very hard to change our minds on a subject even when the facts change.
The desire to appear consistent is a very powerful psychological effect. Robert Cialdini explains this in his excellent book, Influence: The hidden power of persuasion. He describes how getting people to agree to and write down statements was used to great affect by the Chinese Army on American POW’s in the Korean War. The Chinese would start by asking a POW to agree to a simple statement such as ‘America is not perfect.’ Since this was undoubtedly a true statement as far as the majority of POW’s were concerned then complying with this request wouldn’t have seemed a big deal. However once they had written the statement the POW’s would be asked to write a list of ways in which America is not perfect. Once they had agreed in writing that ‘America is not perfect’ it became very hard not to comply with the second request and add some details. This list would then maybe read out on the camp radio with their name making the public commitment complete. Compared to the harsh conditions of the Korean POW camps the Chinese camps were far more effective at getting prisoner compliance. Breakouts were very rare and given their public statements of compliance POW’s often turned in fellow countrymen for minor rewards such as a small bag of rice.
Psychology researchers replicated this effect in a kinder setting in an experiment conducted in California. They approached households and asked if they would mind displaying a small sign on their lawn asking passing drivers to ‘drive carefully’. Since careful driving in their neighbourhood was a public good that all householders were interested in and the signs were not particularly disruptive it’s not surprising most of those approached agreed to display the small sign. The power of the desire to be consistent with one’s former actions was shown two weeks later when the researchers returned to ask if the householders would mind displaying a much larger and uglier ‘Drive Carefully’ sign that they’d mocked up in a brochure. Here over 50% of householders who’d displayed the smaller sign agreed to display the larger sign compared to less than 20% in the ‘control group’ of householders who were not first approached to display the smaller sign. That’s a big change in average behaviour from a small public commitment.
The power of public commitment can be a useful aide when trying to do more exercise or give up smoking. However when it comes to the complex and rapidly changing environment of investing being fixed in one’s opinion is rarely good. Once we publically take a position, like a positive write-up of a company on a website, it becomes much harder not to commit further by buying shares or increasing a position. And much harder to sell a position for which we’d previously made positive public statements.
I sometimes I find this effect even manifests itself in the amount of research I do. The more I research a company the more I want to appear consistent to myself that the hours of work are worth it, the more likely I am to find justifications why this is a good buy (or sell) and more likely to take a position. Then given the amount of research done I’m more likely to share this publically and compound the effect.
And the most worrying thing about the ‘consistency’ effect is that we may be completely unaware of its influence on us. The same researchers who did the initial experiment with the 'drive carefully' sign repeated it but rather than using the small sign as the initial influencing factor they asked residents to sign a petition agreeing with ‘keeping California beautiful.’ Surprisingly this, effectively nonsense petition, had the same effect as the small sign in activating the residents’ sense of civic duty and led them to accept the large ‘drive carefully’ sign in almost a similar proportion. But more assiduously, whereas maybe some of the participants in the initial study may have thought ‘hang on a minute, I’m only accepting this large sign because I accepted the small one two weeks ago’ in this case I would imagine very few people made the link between accepting the large sign and the petition they signed a few weeks ago. Yet the evidence is that it was a significant influencing factor for many of them.
Sharing research and investment ideas can be a key part of getting feedback and improving your investment skills as well as being part of an active part of an online community. However next time you make a public statement about the investment merits of a particular share it’s worth thinking in advance of what events would cause you to change your mind and sell (or cover a short.) Even better write them down, so you have made a public commitment to yourself to change your mind if the facts change and you’ll at least want to appear consistent to yourself with that.