Biases of Social Interaction

My son was reading a book about the Civil Rights movement recently and he asked me what causes a group of people to act in a certain way?  It took me a while, but I related it back to my interest in Behavioral Finance.

The answer I gave him related to the biases of social interaction:

Herd Mentality or Bandwagon effect– Like other social animals, people tend to follow the behaviors and opinions of the majority to feel safer and avoid conflict.   If the majority of the group starts to move in one direction the others instinctively follow.  The Solomon Asch conformity experiments in the 1950’s demonstrated the degree to which an individual’s own opinions were influenced by those of a majority.

The biases of social interaction helped racism to permeate through the south for a long period of time.

These same biases also contribute to many of the bubbles that we have seen in the markets.  The tech bubble and the housing crisis went to extreme levels as more and more people heard of how much money everyone else was “making” and chased into the markets.

People have talked about the current stock market and asked if we are in a “Bubble?”  My answer is that we are still far from people “herding” into the market.  When I start to see that behavior, my opinion will change.