Some time ago, I wrote about some peer pressure studies by Solomon Asch. It’s been one of our most-read posts ever. Now Michael Maubaussin of Legg Mason has taken up this thread and in this video discusses new research from Emory University. Researchers at Emory used an MRI to see which areas of the brain were activated during cognition. It turns out that when people are conforming in the Asch study model, they are not remaining independent, but then making a conscious choice to conform. The pressure to conform actually changes their perception. (And you have to watch the video to see what happens to the subjects that do remain independent and go against the crowd.)
In other words, you might never see the bubble coming because it will no longer look like a bubble to you.
This is a powerful reason to use some kind of systematic model. If you plan to rely on your judgement, it might not be there when you need it. It’s also a very good explanation of why trends and bubbles will continue to recur. Once a trend gets going, everyone agrees on what is happening and the peer pressure tends to make it self-reinforcing. From an investor behavior perspective, it’s perhaps not all that surprising that trend following works.
