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.
Great post – I’ve submitted it to the UKFinanceOver30 sub-reddit.
ReplyDeletehttps://www.reddit.com/r/UKFinanceOver30/
Mike - the7circles.uk
Thanks Mike
ReplyDeleteYes feel free to copy anything here over to the reddit.
Cheers, Mark
Excellent post, and blog which I have added to my Feedly feed.
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