STREET DOGS

From Jason Zweig in The Wall Street Journal: Why investors so often resemble a school of fish, all changing direction together.

According to a study published in the journal Current Biology, 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 specialises 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 gives them pleasure.

“If someone agrees with your choice, it’s intrinsically rewarding in the same way food or money is rewarding,” says Chris Frith of University College London.

Why might other people’s estimates of worth lead you to change your own? Their appraisal could make you unsure that yours is correct. You might become more popular once you agree, or joining the experts may make you feel like one yourself. “We are very social creatures,” says Frith, “and we are desperately keen to be part of the group.”

“What’s more, when someone influences you, it happens very quickly, in under a second,” according to Daniel Campbell Meiklejohn of Aarhus University. “That mechanism can travel quite quickly through a population.”

The study also shows that learning that the experts agree with one another, regardless of whether you agree with them, triggers activity in the insula, a brain region associated with pain and heightened body awareness. This suggests that the agreement of others may have a special ability to grab our attention.

No wonder that a consensus opinion is almost impossible for many investors to ignore.