When Seeing Isn’t Believing: The Power of Social Pressure

The Experiment?

A simple, yet extremely interesting and classic experiment in social psychology was carried out in 1951 - trying to visually determine the lengths of lines and finding their equals. The experiment was carried out at Swarthmore College, Pennsylvania USA by Prof. Solomon Asch, a Polish American social psychologist (Asch 1951, 1955). Most importantly, more than the seen results of the experiment, the unseen and derived conclusions are what’s this is all about!????

The experimental setup was simple- four lines on two cards (fig.1). The test, proposed as visual acuity test to the 8 participants, was to determine as to which of the three lines- A, B or C- was close to or equal to X. As can be observed, the correct answer in the present setup was B.??

The said experimental setup was used again and again with varying line lengths and the correct line changing its position in each setup. A group of observers were called for the test. Each participant was asked to answer as to which line out of A, B or C, was the closest in length to the line on the left card. They were expected to announce their answers loudly for all others to hear. However, unbeknownst to the 7th participant, who was the real “critical subject” of the experiment, the rest of the observers were all “confederates” of the experimenter.??

In the initial rounds, the confederates and the subjects, gave almost correct answers.??

Then followed the real “test”.??

The 6 confederates before the subject participants started picking up the wrong options and announced them loudly- for eg. A or C in the above setup diagram. The reason for placing the subject at the 7th position was also deliberate- by the time the subject’s turn comes to respond, the responses of majority members of the group are already known.?

The unanimous wrong choice and its loud assertion was also intentional. The purpose- to see whether the subject, even though he could see the correct answer, goes with the majority and modifies his/her choice. Basically, the con was to see whether the subject disbelieves his/her own eyes! The results were quite revealing- approx. 75% of the participants answered wrong at least once and 37% went along with the group.??

Image source- https://sproutsschools.com/aschs-conformity-experiment-can-you-withstand-groupthink/ ?

Evidently the peer pressure of the confederates led to the distortion of the subject’s judgement and influenced the decision flip. Participants changed their answer to conform to how the others in the group responded. The experiments revealed the degree to which a person's own opinions are influenced by those of a group. The experiments also looked at the effect that the number of people present in the group had on conformity. When just one confederate was present, there was virtually no impact on participants' answers. The presence of two confederates had only a tiny effect. The level of conformity seen with three or more confederates was far more significant (fig. 2).?

The said experiment has now been named as the Asch Conformity Experiments (IGNOU n.d.). Although heavily critiqued (Mcleod 2023) - biased sample (all males of same age group), lacking ecological validity & generalizability, the Asch conformity experiments are among the most famous in psychology's history and have inspired a wealth of additional research on conformity and group behaviour. This research has provided important insight into how, why, and when people conform and the effects of social pressure on human behaviour.??

The curious case of Conformism?

Conformity (Coultas and Van Leeuwen 2015) is the tendency to adjust one's behaviour, beliefs, or opinions to align with those of a group. While the term "conformity" is often associated with human behaviour, it extends far beyond our species. In the animal kingdom, conformity is prevalent in primates like chimpanzees, capuchin and vervet monkeys.??

Conformity has thus evolved as a fundamental aspect of human nature due to its adaptive value in promoting learning, survival, reproduction and cultural & knowledge transmission. It's a powerful social force that can drive both positive and negative outcomes.??

Conformity is influenced by several factors, including social pressure, the desire for acceptance, and fear of rejection. People often conform to fit in with a group or avoid isolation. In uncertain situations, individuals look to others for guidance, leading to conformity. Cultural norms and situational factors, especially in collectivist societies, emphasize group cohesion, increasing conformity. Authority figures and strong group dynamics also play a role, as do personal traits like low self-esteem and the need for social approval.?

While we are discussing Conformity, it is pertinent that we understand two other interconnected psychological phenomena that often influence individual and collective behaviour - Preference Falsification and Bandwagon effect. Preference falsification (Kuran 1995), a concept notably explored by economist Timur Kuran, is a social phenomenon where individuals misrepresent their true preferences or opinions in public due to social pressures or the fear of repercussions or other negative consequences. This behaviour is often driven by the desire to conform to group norms. It can lead to a distorted perception of public opinion, as people's expressed preferences may not accurately reflect their true beliefs. On the other hand, Bandwagon effect (sometimes also referred to as contagion effect) (Schmitt‐Beck 2015) is a psychological phenomenon and cognitive bias where people do or commit to something primarily because many others are doing it. The bandwagon effect operates through a self-reinforcing cycle, spreading rapidly and widely via a positive feedback loop—where the more people who are influenced by it, the more likely others will be influenced as well.?

The combination of conformity, preference falsification, and the bandwagon effect can have significant implications for individuals and society. Conformity creates a social pressure to align with the majority, which can lead to preference falsification as individuals hide their true opinions. When a significant number of people adopt a particular behaviour or belief, the bandwagon effect takes hold through a positive feedback loop, further reinforcing conformity and potentially increasing the pressure to falsify preferences.??

On a positive note, these phenomena can facilitate social cohesion and cooperation. However, they can also lead to irrational decision-making, groupthink and the suppression of dissenting opinions. And the world did witness the gory impact of their interplay during many episodes of ethnic cleansing during the 20th century- the Holocaust during WW 2 (1941-45) (Berenbaum 2024) and the Rwandan genocide (1994) (Britannica 2024), to name a few. In many of the episodes highlighted, the perpetrators argued that “they were simply following orders or conforming to the norms of the respective regime”. This defence reflects that the powerful role of conformity and the desire to fit in can compel people to conform to destructive ideologies, even when they conflict with personal morals. Most importantly, the interplay doesn’t only impact the political and social arena but has deep impacts on finance and economics- at individual level as well as at macro level.??

Conformity and Financial Bubbles: A Perfect Storm?

Financial bubbles characterized by rapid price increases followed by sudden crashes, are often fuelled by psychological factors of the underlying investors, with conformity being one of the most critical. Historically, financial bubbles illustrate how group behaviour can drive markets to irrational extremes. One framework, the Kindleberger–Minsky model (Mehrling 2023) takes a conceptual approach by separating the rise and burst of a speculative bubble into five phases- (1) displacement (2) boom (3) euphoria (4) financial distress and (5) revulsion (Fig.?3).??

The model can be understood as follows- Someone starts telling an exciting story. At first, only a few people are listening (displacement), but as the story gets more exciting, more and more people gather around (boom). Everyone's excited, laughing, and cheering (euphoria). But suddenly, the story ends in a weird or unexpected way and people start feeling unsure or scared (financial distress). Then, everyone quickly leaves the party, and it ends in a big mess (revulsion).?

One of the primary reasons for conformity in financial markets is the pressure to conform to the perceived wisdom of the majority. Conformity plays a significant role in the emergence and expansion of financial asset bubbles plays out in the form of??

·?????? Information Cascade: As investors see others buying, they assume these investors possess superior information, leading them to follow suit, creating? an information cascade, where everyone acts on the same information, regardless of its accuracy.?

·?????? Social Proof: The success of early investors becomes proof, reinforcing the belief that investing in the asset is a profitable strategy, attracting more investors, further inflating the bubble.?

·?????? Fear of Missing Out (FOMO): Fear of missing out on potential gains can also drive investors to conform to the prevailing market sentiment, exacerbating the bubble.?

·?????? Bandwagon Effect: As prices rise, more investors join the bandwagon, creating a self-fulfilling prophecy where the asset's value seems to justify its ever-increasing price.?

Inevitably, financial bubbles burst. As investor confidence wanes and asset prices become increasingly detached from fundamentals, a correction becomes inevitable. Yet again, conformity plays a role here:?

·?????? Panic Selling: When investors realize that asset prices are unsustainable, a wave of panic selling can occur, leading to a rapid decline in prices.?

·?????? Bandwagon Effect (in reverse): As prices fall, more investors sell, creating a downward spiral.?

Deep impacts of Conformity in financial context?

Conformity and herd behaviour are powerful forces in financial markets. As more investors jump on the bandwagon, the perceived legitimacy of the bubble increases, further fuelling price rises. This is often accompanied by media hype, expert endorsements, and the spread of success stories, all of which contribute to the illusion of a "new normal".??

India’s first major tryst with a financial bubble came in the form of the infamous Harshad Mehta Scam of 1992 (India Today 2020). Harshad Mehta, a stockbroker, exploited loopholes in the banking system to manipulate stock prices. By using funds from inter-bank transactions, he artificially inflated the prices of selected stocks. Investors, seeing these stocks soar and the success of the early investors (social proof), were driven by greed and the desire to not miss out on the apparent windfall, leading to a massive influx of capital into these stocks. This conformist behaviour, where investors ignored the fundamentals and followed the herd, fuelled the bubble (displacement, boom, euphoria). The scam eventually unravelled, leading to a market crash that wiped out significant wealth. The fallout from the bubble burst was severe, shaking the confidence of investors (financial distress, revulsion). On a positive note, the said scam lead to major overhaul and reforms in the Indian financial system.??

In the most recent context, the sharp increase in Indian retail investors entering the stock market, fuelled by growing media hype and endorsements from experts, financial influencers and celebrities is an odd reminiscent of this trend. Despite the fact that 90% of individual traders in the equity F&O segment experience losses (SEBI 2023), the number of de-mat accounts being opened and trading in the F&O has surged significantly (Patnaik 2023).

Young people, eager to make quick money or achieve financial freedom, are trading in stock futures and options—two popular types of derivatives—at an unprecedented rate. The widespread availability of smartphones, affordable data plans, supportive KYC policies, and trading apps offering nearly free trading have driven the financial literacy starved young Indian middle class to flood the stock and derivatives markets, driven more by greed, than by wisdom. This has disturbed the government and the financial regulators both. Increasing speculation in the derivatives space can morph into a macro issue that may have serious repercussions for the broader economy since household savings, rather than going into capital formation, are being diverted for speculative bets through the futures & options segment of the market (Times News Network 2024).?

Reducing Conformity in Investing?

Reducing conformity in financial investing is crucial for individuals to make more informed and independent decisions. Conformity can lead to herd behaviour, where investors follow trends without critical evaluation, potentially resulting in suboptimal or risky investment choices. Here are several strategies to reduce conformity in financial investing:?

1. Educate yourself: The more informed an investor is, the less likely they are to rely on the crowd. Understanding the fundamentals of markets, different asset classes, and financial instruments allows investors to critically evaluate their options. Engaging in educational activities and staying updated on financial news and trends can help individuals make more informed decisions based on facts rather than following the herd.?

2. Have your own investment strategy: Define personal financial goals, risk tolerance, and investment horizon. A clear plan tailored to individual needs can help resist the pressure to conform to what others are doing. A well-diversified portfolio which can include different asset classes, industries, and geographies, reduces the impact of any single market trend.??

3. Do independent research: Before following a market trend, perform independent research to understand the underlying reasons. Consider whether the trend aligns with personal investment goals and risk tolerance. Rely on various information sources rather than just following popular media, celebrity endorsers, financial influencers or advice from friends. Cross-check facts and opinions to form a more balanced view.?

4. Avoid social media for investment advice: Social media and online forums can amplify herd behaviour. Limiting time spent on these platforms for investment advice can help avoid conformity. Actively seek out opinions that differ from the mainstream view. This can provide a broader perspective and help identify potential risks that others might overlook.?

5. Stay calm during market volatility: Markets, by their very nature, can and will, be volatile, and it’s easy to get swept up in the panic or euphoria of the moment. Staying calm and sticking to your investment strategy can prevent impulsive decisions based on conforming to other people’s activities. Periodically review your portfolio to ensure it aligns with your goals and strategy. Avoid making changes based solely on short-term market movements or popular opinion.?

6. Consult with a Financial Advisor: A qualified financial advisor can provide personalized advice and help investors make decisions based on their specific situation, rather than following what others are doing. Don’t hesitate to question or challenge the advice given by your advisor. This ensures that the advice is well-reasoned and in your best interest, rather than just following market trends.?

By adopting these strategies, individuals can foster a more independent, thoughtful, and disciplined approach to investing, reducing the impact of conformity and increasing the likelihood of achieving their financial goals.??

References:?

Asch, Solomon. 1951. “Effects of Group Pressure on the Modification and Distortion of Judgments.” In Groups, Leadership and Men: Research in Human Relations, Carnegie Press, 177–90. https://books.google.co.in/books?id=DGjQAAAAMAAJ&pg=PR3&source=gbs_selected_pages&cad=1#v=onepage&q&f=false .?

Asch, Solomon. 1955. “Opinions and Social Pressure.” Nature 176(4491): 1009–11.?

Berenbaum, Michael. 2024. “Nazi Anti-Semitism and the Holocaust.” Encyclopaedia Britannica. https://www.britannica.com/topic/anti-Semitism/Nazi-anti-Semitism-and-the-Holocaust (December 8, 2024).?

Britannica, The Editors of Encyclopaedia. 2024. “Rwanda Genocide of 1994.” Encyclopaedia Britannica. https://www.britannica.com/event/Rwanda-genocide-of-1994 . (August 12, 2024).?

Coultas, Julie C., and Edwin J. C. Van Leeuwen. 2015. “Conformity: Definitions, Types, and Evolutionary Grounding.” In Evolutionary Perspectives on Social Psychology, Evolutionary Psychology, eds. Virgil Zeigler-Hill, Lisa L. M. Welling, and Todd K. Shackelford. Cham: Springer International Publishing, 189–202. doi:10.1007/978-3-319-12697-5_15.?

IGNOU, egyankosh. “Unit-4 NORMS AND CONFORMITY- ASCH’S LINE OF LENGTH Experiments’.” https://egyankosh.ac.in/bitstream/123456789/23595/1/Unit-4.pdf (September 8, 2024).?

India Today. (2020, October 20). Harshad Mehta securities scam: India’s legacy of bank fraud. India Today. https://www.indiatoday.in/business/story/harshad-mehta-securities-scam-india-legacy-of-bank-fraud-1733374-2020-10-20 (August 13, 2024)

Kuran, Timur. 1995. Private Truths, Public Lies: The Social Consequences of Preference Falsification. Harvard University Press.?

Mcleod, Saul. 2023. “Solomon Asch Conformity Line Experiment Study.” Simply Psychology. https://www.simplypsychology.org/asch-conformity.html (December 8, 2024).?

Mehrling, Perry. 2023. “Fellow Traveling Theorists of National and International Financial Instability.”?

Patnaik, Tirthankar. 2023. “Retail Investment in India.” BANKING AND FINANCE (22).?

Schmitt‐Beck, Rüdiger. 2015. “Bandwagon Effect.” In The International Encyclopaedia of Political Communication, ed. Gianpietro Mazzoleni. Wiley, 1–5. doi:10.1002/9781118541555.wbiepc015.?

SEBI. 2023. Analysis of Profit and Loss of Individual Traders Dealing in Equity F&O Segment. Mumbai.?

Times News Network. 2024. “Savings Are Going into Speculative Activities like F&O Bets: SEBI Chief.” Savings are going into speculative activities like F&O bets: SEBI chief. https://timesofindia.indiatimes.com/business/india-business/household-savings-diverted-to-speculative-fo-bets-sebi-chief-warns-of-economic-impact/articleshow/111872666.cms (December 8, 2024).?

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