Thursday, August 12, 2010

Tuning Out the Consensus

It's difficult to not be influenced by consensus opinion. This Wall Street Journal article explains some fundamental reasons why it's not easy to be contrarian based upon a study in the journal Current Biology,

What did the study find?

Well, according to the study it turns out...

...the value you place on something is likely to go up when other people tell you it is worth more than you thought, and down when others say it is worth less. More strikingly, if your evaluation agrees with what others tell you, then a part of your brain that specializes in processing rewards kicks into high gear.

In other words, investors often go along with the crowd because—at the most basic biological level—conformity feels good. Moving in herds doesn't just give investors a sense of "safety in numbers." It also gives them pleasure.


Apparently, scans revealed that one of the brain's reward centers (a region called the ventral striatum) basically lit up when participants learned that they had chosen the same song as the experts. The ventral striatum is a region wired with dopamine neurons.

Also, that others agree with your choice is rewarding in the same way food or money is and the forces at work can travel quickly through a population.

Herding is a real force and apparently operates a fundamental biological level.

Buy what you understand, especially when it's unpopular, and learn to mostly ignore what others are doing.

Adam

HT: Gaurang Sathaye

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