The definition of “informational conformity” is when you go along with a group because what they say convinces you they’re right. A study by Solomon Asch proves this. First of all, correct, had no idea who we was until I looked him up.
Here’s the study: show someone a line drawn on an index card, that’s the line on the left below. Show them three more lines directly to the right of that line. Only one of those lines on the right is the same height as the one on the left. Ask them which line on the right is the same height as the line on the left.
But here’s what happened, when they asked a guy in the study if A, B, or C was the same height as the line on the left, when others in the group answered before him and gave either A or B, he often did the same. He went along with what they said, even if the correct answer is obviously C and he could see that.
You know who those people are. You’re in a meeting and they just go along with everyone else because they’re too much of a pansy to go against the grain.
Mike’s Boss: “Mike do you think the stock market is going to go up or down?”
Mike’s Boss: “That’s not an answer”
Mike: “Whatever they say” (points to colleagues doodling on white notepads hoping not to make eye contact with boss).
The bottom line is these people cave and conform even if they know what they’re conforming to is probably wrong. Why?
Because being wrong with others who are wrong is safe. Being wrong by yourself is risky.
It gets better. When the guy above was told to write down his answer (vs. vocalize it) so others could not hear it (after they gave A or B answers that are clearly wrong), he put C. His conformity dropped by two-thirds. Why? Because he could feel no shame if he was wrong. They couldn’t see his answer since he wrote it down instead of vocalizing it.
“Normative conformity” is when we just go along with other hacks because we think they are going to disapprove of what we say. In other words, like in the above situation, when nobody is looking we don’t have to worry about their disapproval so we do what we think is the right thing, even if we still don’t know the right answer.
And this is why when it comes to investing, the people who are willing to be wrong both privately and publicly (by themselves, as the weirdos, while everyone else is doing something else) will win in the end.
These investors don’t stress out about whether or not their opinion is right or wrong. They care about mitigating losses if they’re wrong (by having risk controls in place) and having a plan B in place if they’re wrong (“if I’m wrong, that means X, so now let’s try that).” These people don’t get caught up in the shame of being wrong.
Buying stocks when everything is going up in value is easy. Your financial advisor is not a genius right now sorry. The Nasdaq just closed at its highest level in 15 years and we’re now in the sixth year of a bull market in stocks. Your financial advisor is a genius when everything is going up in flames, they are looking for distressed assets selling on the cheap while everyone else is debating the “new normal,” and they crush it for you. Where is that advisor? Insert cricket noise.
That’s why you have to do it yourself or be involved with your investments. There is a very good chance your typical advisor will not risk being wrong by themselves when we are in financial armageddon. They will probably go with the herd. It’s too risky for them and their business to do otherwise. But not for you.
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