In 1964, Kitty Genovese was murdered by an assailant in plain view of many observers. While the original story that the NY Times published overstated the number of observers who did nothing, a revised accounting upon the death of her murderer a few years ago did show that there were a number of people who did observe the attack and yet did nothing. Why? Initial reasons were apathy, impersonal environments of a large city (NYC), etc.
Two psychologists examined this story and did experiments to understand why many people saw this and did not help. Lack of apathy did not strike them as a possible explanation. Their analysis yielded insights into a phenomenon they call pluralistic ignorance - why does a group get dumb (not quite the “wisdom of the crowds” where crowds ostensibly get smarter)? Their analysis: When we observe something that looks anomalous, we first look at how other people are reacting to it, in order to gauge how we should respond. If others are not responding, we don’t respond as well. If others start responding, we do as well. In the Kitty Genovese case, people saw the attack occurring in public and assumed that because other people who were also observing were not responding it was ok.
So, first a quick personal safety tip for all: Imagine that you are out and you take (or, someone you are with takes) ill. Instead of weakly calling for "Help" (as Kitty did) or slumping to the ground and hoping that some kind passerby helps, give a particular person a concrete task. “You there in the blue sweater. I am ill. I need help. Call 911.” This concrete assignment of an action item to someone breaks this “pluralistic ignorance” – one person acts to help. As one person leaps in to help, others do too. (As an aside, I have shared this with my elderly parents and relatives just in case.)
(For a more rigorous understanding of our underlying psychological biases that drive our behavior read Bob Cialdini's Psychology of Persuasion which discusses this concept and the Kitty Genovese story in great depth.)
Now let's talk about the applicability of this phenomenon to investing. Where does pluralistic ignorance occur? In the world of investing if the sole/primary reason you buy/sell something is because others are buying or selling too. This is investing without a thesis (which, the dictionary defines as "a statement or theory that is put forward as a premise to be maintained or proved"). A thesis outlines your rationale for investing - and the rationale must be based on fundamentals (not others' opinions, not even those of Warren Buffett or other luminaries). Consider, for example, the recent craze in crypto investments where pluralistic ignorance seems to abound. Ask someone what their investment thesis is. Their reasons may be one of many ("blockchain is gonna rule the world," "gets away from printing money," "no more government and 2008 style crashes," etc.) but poke deeper and you will find bundles of contradictions (lack of distinction between asset price and underlying technology, etc.). That's when you know you have pluralistic ignorance on your hands: they buy because the price is going up or sell because the prices are coming down (they do what are others are doing). In the investing world, this is the "greater fool theory."
To be sure, every investment thesis (however sound) rests on a few untestable propositions that may turn out to be wrong. Consider, Warren Buffett's exhortations to invest in a low-cost S&P500 index fund. There's a ton of data/research that backs this up (I have previously posted this in the form of two investment fables here and here). But peel back the onion and there is (at least) one unknowable: How strong will the United States be over your investing horizon of (say) 20 - 50 years? If capital were to flee the US because (say) China or India or Australia or ... became more attractive in the next 25-50 years, then the S&P500 may cease to have the returns that it has historically delivered.
In summary: When investing avoid pluralistic ignorance by having a well-defined thesis articulated (and, researched) that drives your investment. Hard work/research that bolsters your thesis will make your investments as sound as possible and impervious to the siren call of the next "hot stock."
Submitted April 02, 2018 at 09:17AM by arnexa https://ift.tt/2pXCSFm
