{"id":327523,"date":"2022-07-15T18:05:10","date_gmt":"2022-07-15T12:35:10","guid":{"rendered":"https:\/\/zerodha.com\/z-connect\/?p=327523"},"modified":"2024-02-02T13:43:26","modified_gmt":"2024-02-02T08:13:26","slug":"bad-influence","status":"publish","type":"post","link":"https:\/\/zerodha.com\/z-connect\/subtext\/bad-influence","title":{"rendered":"Bad influence"},"content":{"rendered":"

There was a lot of noise on social media over the past few days after a crypto platform recommended by some influencers suspended withdrawals. I don\u2019t want to delve into the issue, a lot has already been said and written publicly. But the whole episode highlights just how influential these influencers have become.\u00a0\u00a0\u00a0\u00a0<\/span><\/p>\n

Monkey see, monkey do<\/b><\/h4>\n

At first thought, it might sound surprising that people invest serious money based on the opinions of random people just because they are famous or have a large following on social media. But if you think about it for a second, we do this all the time. As much as we like to believe that we make rational decisions based on careful consideration of all the available information, that\u2019s not true. If the last 4-5 decades of behavioral science have shown us anything, it\u2019s that we are far more irrational than we like to admit. In fact, if we knew the real reasons behind your decisions, we\u2019d be embarrassed half the time.\u00a0<\/span><\/p>\n

Think about this for a minute. Do you think the choice of the music people listen to can impact the stock market performance? The question itself sounds downright stupid. But as it turns out, the type of music we listen to is indeed correlated to stock market performance and also mutual flows. In a study, <\/span>Adrian Fernandez-Perez and Ivan Indriawan<\/span><\/a> found that when people in a given country listened to positive music, the markets in that country had positive gains and mutual fund flows. Consider this case. Do you think the color in which financial information is presented impacts how you invest? Again, as silly as it sounds, there\u2019s evidence that the color in which numbers are shown can influence how you invest. <\/span>Bazley et al.<\/span><\/a> found that when people saw losses in red compared to black took significantly lesser risks. Similarly, people who view historical stock data in red compared to black expected considerably lower returns in the future.<\/span><\/p>\n

I get that these things sound ridiculous, but as much as we\u2019d like to think that we do something because we want to, that\u2019s another lie we tell ourselves. Every decision we make is influenced by our surroundings, our peers, <\/span>what we eat<\/span><\/a>, culture, social norms, etc. The word \u201cinfluence\u201d can often have a negative connotation, but we\u2019re constantly influenced. Every time you ask a friend about a restaurant or rely on reviews to buy something or ask others for career advice, you are getting influenced, but probably in a positive way.\u00a0<\/span><\/p>\n

It\u2019s the same with money. Other people disproportionately shape our attitudes and <\/span>beliefs about money<\/span><\/a>. One big reason why most Indians invest in fixed deposits and gold is because that\u2019s what their parents and friends do\u2014social conformity.\u00a0\u00a0\u00a0<\/span><\/p>\n

We’re also hardwired to avoid regret when making decisions. One way we try to minimize regret is to look for safety in numbers or follow the herd. There was a hilarious, yet brilliant experiment on the show <\/span>Brain Games <\/span><\/i>by National Geographic. There\u2019s a waiting room filled with actors who are all in on the act except one woman. The actors are told in advance to stand up whenever there\u2019s a beep in the room, and they start doing that. At first, the woman is puzzled and has no idea what\u2019s happening and doesn\u2019t get up. But after a few beeps, she starts following the other actors, even though she has no idea why. She continues standing up, even after the actors leave the room. She continues to stand up at every beep even when new people who aren’t clued in enter the room. Soon, the new people in the room start following her. This is a <\/iframe> demonstration<\/a> of the power of social settings and norms on our behavior.\u00a0<\/span><\/p>\n