Are you a rugged individualist or conformist lemming when it comes to investing?
Spend too much time on internet investment forums and you may well turn lemming.
Despite our best efforts to remain defiantly individual, ignoring group behaviour, evidence suggests we often conform.
Nowhere is that more apparent than the internet, where people find themselves huddled in biased groups telling themselves exactly what they want to hear, but more on that later.
Several studies since the 1950’s have shown the inclination of individuals to conform in group situations.
When publicly asked a question after other group members have deliberately answered the same question wrongly, 75% of individuals will conform to a wrong answer at least once.
On its own, not conclusive, but in a similar study, conforming individuals’ brains were scanned.
The scan revealed when individuals conformed to the group’s wrong answer, the part of the brain associated with logical thinking decreased in activity – essentially they stopped thinking!
Similarly, when people find themselves in common groups, those groups often help reinforce views, not because they’re right, but because they’re repeated frequently – like on an internet forum.
Given investment forums have visible histories they make great research tools, especially when companies have gone bad.
Hotcopper is Australia’s busiest investment forum; it provides multiple cautionary tales on the dangers of group think when investing and buying individual shares.
All the well-known company failures are preserved in their gory detail – Babcock & Brown, Allco Finance, Gunns, ABC Learning, AED Oil.
Space prevents me from going into great detail, but common themes run through all the company discussions.
As share prices soar, posters proclaim outlandish price targets, ignore any warnings and regurgitate any positive information they find.
When share prices fall and companies crumble, posters reassure each other it’s only temporary, the falling price is a buying opportunity and those massive company debts are serviceable.
Sadly, it’s only when the administrators are called that the fog of groupthink begins to clear!
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL/ACL 224543, www.mfg.com.au This information is general in nature and readers should seek professional advice specific to their circumstances. Searching for the top financial adviser in Australia?
