19th September 2012
Gary Charness and Matthias Sutter, in the Journal of Economic Perspectives, writes that groups make better self-interested decisions:
"In a nutshell, the bottom line emerging from economic research on group decision-making is that groups are more likely to make choices that follow standard game-theoretic predictions…in this sense, groups are generally less "behavioral" than individuals."
This means we can steer away from the array of biases – some are listed here by Business Insider – that impact all our decisions.
So how this be applied to investment skill?
These days we don't have to rely on just our own heads, or that of a single fund manager, to make our investment choices.
The benefits of group think are to be found everywhere. Mindful Money is itself a social news and knowledge network, aimed at empowering the investor.
Asset managers can no longer go it alone and need an approach that will build trust and engagement through a social contract. There might be social networks as most understand them through Facebook and Twitter, but the unique voices of expert bloggers to inform away from PR-spin is also invaluable.
And there are numerous voices out there that you can choose to listen to – so you don't need to join a round table discussion to get the benefits of group think.
Gaining confidence in our decisions
To stand alone is to feel vulnerable, says Money Management.
From a psychological perspective, there is evidence that as humans we seek social validation to justify our decision-making, and we are most receptive to information that confirms and reinforces our existing beliefs.
A simple but powerful example of this behaviour is provided by a 1960s ‘sky-gazing' experiment. In this, man stopped on a busy New York sidewalk and gazed up to the sky.
The intention was to assess the effect on passers-by.
Only about 4 per cent of passers-by joined the man in looking up.
When the number of initial planted up-lookers was increased to five men looking up at nothing, 18 per cent of pedestrians joined them.
With a starting group of 15 sky-gazers, 40 per cent of passers-by stopped and joined them in looking skyward.
As Cialdini (2004) explains it:
"One fundamental way that we decide what to do in a situation is to look to what others are doing or have done there. If many individuals have decided in favour of a particular idea, we are more likely to follow because we perceive the idea to be more correct, more valid."
Of course, there is the danger that this could lead to herding, and all making the same choices. But there is also the possibility of a more radical stance…
Beware of group polarization
People sometimes make more extreme or radical decisions in a group than individually – whether this is an advantage of or depends on the situation.
In Going to Extremes, author Cass R. Sunstein offers insights into why and when people gravitate toward extremism.
Sunstein marshals a wealth of evidence that shows that when like-minded people gather in groups, they tend to become more extreme in their views than they were before.
For example, when liberals group get together to debate climate change, they end up more alarmed about climate change, while conservatives brought together to discuss same-sex unions become more set against same-sex unions.
Psyfi blog notes: Way back in 1959 James Arthur Finch Stoner of Antioch College submitted his Masters thesis, entitled A Comparison of Individual and Group Decisions Involving Risk.
He observed: "The analyses shows that when the subjects reached decisions as members of a group they tended to advocate significantly more risky courses of action than they had chosen when they reached decisions as individuals".
Even better, or worse, according to your viewpoint, people who agreed with the group decision became more confident about the decision, while those who disagreed became less confident about their own opinion. The group opinions polarized to a more extreme position.
… other dangers of group think
The influence of social validation can lead investors into trouble.
Too much diversity, for example, or diversity when diversity is not needed, can reduce cohesiveness and affect the decision making process.
Also, with too many people involved, more time is required to reach a decision which reduces efficiency.
Perhaps, then, the best path is to seek opinion elsewhere for the benefit of group think, but ultimately, when it comes to investment, go with what suits your risk profile.
More on Mindful Money:
To receive our free daily newsletter sign up here.