The Little Book of Behavioral Investing: How not to be your own worst enemy

Chapter Fourteen

Inside the Mind of a Lemming

Becoming a Contrarian Investor

 

 

 

 

 

 

AS WARREN BUFFETT OBSERVED, “A pack of lemmings looks like a group of rugged individualists compared with Wall Street when it gets a concept in its teeth.” Of course, this is a highly defamatory statement with respect to lemmings.

A willingness to subjugate one’s own thoughts for those of a group is a sadly common behavioral affliction. Take a look at the four lines in Exhibit 14.1. Your task is to pick which of the lines on the right most closely matches the line on the left.

EXHIBIT 14.1 Pick the Line

If you are like most people this won’t be a huge challenge. One of the lines is clearly too short, one is obviously too long, and one fits the Goldilocks outcome of just about right.

But what if you were in a room with seven other people, each of whom declared that the longest line was the closest match? Would you stick to your guns or would you bend in the face of a clear unanimous majority?

Of course, a rugged individual like you, would stick to their guns, right? Well, the evidence casts serious doubt on people’s ability to maintain their independence in the face of pressure.

Experiments like the one on page 168 have been relatively commonplace since the 1950s.⁵⁶ The basic setup is that you are one person in a group of eight or so. Unknown to you, the other participants all work for the experimenter. ...