What is it? Remember the old saying, "When in Rome, do as the Romans do." The social proof tendency is the automatic tendency of humans to think or act as those around them. Says Munger, ""Monkey see, monkey do" is the old phrase that reminds one of how strongly John will often wish to do something, or have something, just because Joe does or has it."
This tendency does have its advantages. If you're new in a city, say, Mumbai and don't know the way around to the stations - the lifeline of the city - then you just need to follow the flow of the crowd. If the crowd is swelling up, you are most likely on the right track to the station.
It is important to keep our minds open when situations that can cause this tendency arise before us. Says Charlie Munger, "When will the social-proof tendency be most easily triggered? Here the answer is clear from many experiments: Triggering most readily occurs in the presence of puzzlement or stress, and particularly when both exist."
Following the actions of others is not the only cause of this tendency. Rather, inaction, is in itself an action. It signals to the brain that inaction on the part of others is the right course of action.
Often found in: Looking what others are doing and doing the same thing.
In Life: Want some excellent parenting advice you don't see in papers everyday? Listen to Munger, "Teenagers' parents usually learn more than they would like about teenagers' cognitive errors from the social-proof tendency. This phenomenon was recently involved in a breakthrough by Judith Rich Harris, who demonstrated that superrespect by young people for their peers, rather than for parents or other adults, is ordained to some considerable extent by the genes of the young people. This makes it wise for parents to rely more on manipulating the quality of the peers than on exhortations to their own offspring."
In corporations: The social- proof tendency is common in corporations too. Less than two months before the financial crisis of 2008, there was a mad rush to grab real estate in the suburbs of Mumbai. One particular plot of 178 acres belonging to PAL-Peugeot in the Kalyan-Dombivili area saw 35 bidders that counted the who's who of real estate industry and included players like DLF, Indiabulls, Unitech, Omax, Akruti Nirman and the Hiranandani group.
The role of outside directors is often debated in the media. It's not without cause. Outside directors are a checking mechanism in the boardroom. What happens in reality though is far from it. Recall that Satyam Computers had many prominent members of society on its board of directors at various times, yet none had any idea of what was really going on in the company. Putting in Charlie Munger's words, "The outside directors on a corporate board usually display the near ultimate form of inaction. They fail to object to anything much short of an axe murder until some public embarrassment of the board finally causes their intervention. A typical board-of-directors' culture was once well described by my friend, Joe Rosenfield, as he said, 'They asked me if I wanted to become a director of Northwest Bell, and it was the last thing they ever asked me'."
In investing: Many investors try to follow in the footsteps of famed investors - buying what they buy and selling what they sell. The problem with such a practice is (1) you do not know the investment rationale or horizon of the famed investor, and (2) you may be caught unaware if that famed investor makes a quiet exit from the stock.
Here's a piece of advice from Munger. "If only one lesson is to be chosen from a package of lessons involving the social-proof tendency, and used in self-improvement, my favorite would be: Learn how to ignore the examples from others when they are wrong, because few skills are more worth having."
You just read about one of the misjudgements people generally make while investing. Read 25 ways to (Not) make mistakes to get an account of Charlie Munger's twenty-five typical misjudgements, along with our commentary on how they fit into Indian businesses and Indian investments.