STREET DOGS

People tend to evaluate their thoughts and behaviours based on other people. Consequently, what we believe is often heavily influenced by what we think others believe, and our interpretation of the social environment.

In so doing, we tend to overestimate the level to which others share our beliefs, attitudes and behaviours. We like to think others believe what we believe — something social psychologists call the false consensus effect.

Research around mandatory seat belt laws, for example, shows that people who support the laws assume that 65% of others feel the same way. Those who don’t support these laws, believe only 36% of others support such laws.

It’s a bias that might not seem overly important. It might even be argued that such a false consensus increases self-esteem and confidence. But it also leads us to overestimate the correctness of our own thinking and to underestimate both the extent and correctness of alternative thoughts. When it comes to the stock market, this is a dangerous thing: creating a belief that our own opinion on the prospects of a company, on the value of a security, on the timing of a buy or sell decision and myriad other decision-making issues is the more common, and thus more correct than that of those who disagree.

An important part of sound decision-making is the ability to predict other investors’ intentions and behaviours to determine potential trends.

The false consensus effect will bias us to overestimate the extent to which other investors share our expectations of likely trends.

Research suggests that brokers and analysts are equally, if not more, prone to the false consensus bias. Hence the need to actively seek out the opinions of those with whom we disagree.