Social Proof is described as a psychological and social phenomenon wherein people copy the actions of others in an attempt to undertake behavior in a given situation.
Social proof is considered prominent in ambiguous social situations where people are unable to determine the appropriate mode of behavior and is driven by the assumption that the surrounding people possess more knowledge about the current situation.
Social proof is one type of conformity. When a person is in a situation where they are unsure of the correct way to behave, they will often look to others for clues concerning the correct behavior. In times of ambiguity and confusion, we go by what others are doing in a similar situation and go with them.
Psychologically, this decision-making process makes us feel better. Since many of us are doing the same thing, we end up feeling it should be right.
Every manufacturer and service provider uses Social proof to market their products/services. That is the reason you see many celebrities/influencers endorsing a product/service.
As per Nielsen’s reports, 83% of consumers across 60 countries say they trust these recommendations/endorsements in choosing the products/services. This is the power of influence people around us create in making our decisions.
To give a few examples from our daily lives where we make decisions based on what the people around us use/recommend :
- Restaurants to eat food
- Hotels to stay on vacation
- Schools/colleges our kids to study
- Brands to buy clothes, jewelry, etc
- Doctors for health consultations
- Mobile/wi-fi networks to use and last but not the least
- Options to invest our savings.
Does this behavior of taking investment decisions based on social proof actually affect our investments? If yes, how?
Many of us, take our investment decisions based on influencers around us. For some, Warren Buffett is the influencer, for some Ramdeo Agrawal is an influencer, for some, Rakesh Jhunjhunwala is the influencer. For few, their parents or friends or siblings are the influencers. Now every individual or a group of people have their own thought process and different style of investing. Every individual comes with different expectations and time horizons.
Not everyone ends up with the same outcome from their investments. The reason being, every individual’s goals, time horizons, risk taking capacity and the time at which they are investing are different.
To give you an example, there are two investors A & B invest in the same fund of a mutual fund house. Both of them were recommended to this fund by someone well known to them. However, both of them have a different goal and time frame for this investment. Here is their experience with their investment.
| Investor | Time Horizon | Returns |
| A | 1 | -35.42% |
| B | 5 | 15.60% |
Now both of them have different expectations with their investments. They went by the decision to choose this fund because of social proof or recommendation by someone whom they think is knowledgeable.
Investor A fell to the social proof and chose the fund that was not suitable to him.
How to avoid this trap of falling to social proof while making our investment decisions.
- Clearly identify the goals and time in hand to reach these goals
- Understand the risks involved in investing any product keeping in mind of your time frame
- Don’t just go by what others are doing/suggesting, they might have Plan B if this doesn’t work out.
- Review all options and seek expert’s advice if need be by letting them aware of your goals, timelines, risk-taking capacity, etc.
Goals (created thru emotions) turn into reality only with an apt financial plan executed without emotions.
Happy Investing and Don’t be a victim of Social Proof Bias.
