How to break out of herd mentality

Researchers observed an interesting phenomenon on the 86th floor of the World Trade Centre during 9/11.

When the plane struck the twin towers, one group of colleagues on the 86th floor didn't panic. Nor did they run for their lives. Instead, they gathered in a conference room to discuss their options.

All of them were terrified. And yet all of them regrouped to see what their friends would do.

The same thing was observed when authorities interviewed several airplane crash survivors.

The first thing people do in times of trouble is?not?panic.

They look at what their neighbors are doing.

If their neighbors are panicking, they’ll panic too. And if their neighbors are calm, they’ll be calm too.

It’s a typical “monkey see monkey do” response.

Doesn't matter how intellectually savvy we think we are; deep down we have animal instincts.

And animals live in herds.

Like it or not, we are influenced by our peers and adopt certain behaviors on an emotional, rather than rational basis.

We copy our neighbors even in mundane tasks.

Professor Jens Krausse of Leeds University conducted an?interesting experiment . He and his colleagues gathered a bunch of people in a big hall and instructed them all to walk randomly inside the hall.

But they gave explicit instructions to 5% of the participants to walk a very particular path.

And guess what happened?

The 95% who were asked to walk randomly just followed the 5%, and everyone walked on the same path.

Herds are often irrational.

In the 16th century, tulips were imported from the Ottoman Empire to Holland. Just a few years after arriving in Holland, tulips became the most sought-after commodity in the Netherlands.

At the time, tulip bulbs were worth more than gold and were sold for ten times what a commoner made in a year.

Farmers pulled out the potatoes and other crops from their fields and planted tulips, and what followed was appropriately named “tulip mania .”

There was no rationale for replacing food with flowers, especially when the bulbs were expensive.

Needless to say, the bubble burst. So much tulip was produced that its price fell. Several farmers went bankrupt.

Because we copy things until they reach their breaking point.

More recently, when the pandemic hit the world, the rate of unemployment broke all records in every country. And yet, we saw the stock markets rise.

Why would the stock market rise when the economy is performing so poorly?

This thoughtless copying causes the problem. It’s what causes the mismatch between productivity and the economy.

Technically, the economy should grow as productivity improves.

We always take things too far. The herd mentality leads to irrational actions.

How to escape irrational herd mentality?

Introduce a circuit breaker.

A circuit breaker is an automatic switch protecting the electrical circuit from damage. They switch off automatically when excess current passes through the circuit.

How can you do that?

By doing two things.

1. Change your environment.

It is the easiest way to escape the herd. We humans are not equipped to go against the herd. Whenever we engage in social behavior, our brains release oxytocin which makes us feel blissful. Agreeing with others releases oxytocin and makes us feel warm and safe.

And so, the most effective way to break the circuit and negate this oxytocin bliss is to change the environment.

That is what Warren Buffett did when he realized that he is getting influenced by other stockbrokers. He moved from New York to Omaha, Nebraska. By insulating himself from the crowd, he made better decisions.

What can you do to change your environment??

2. Develop your cynical muscle.

Question every assumption. And every solution.

You have to dig deeper, which usually takes a lot more effort.

This is often uncomfortable and tiring.

But it's the only way to know when the herd is wrong.

That’s all from me this week.

Neera Mahajan

If you liked this newsletter, please?subscribe? to it.