Social Proofs

Social proofs form the basis for the term herding, which has become popular when describing financial bubbles. 


In his book Influence: The Psychology of Persuasion, Dr Robert Cialdini devotes an entire chapter to the power of social proofs.  The concept comes from a human awareness of the views of society as a whole and a reliance on the wisdom of crowds : the idea that if an opinion is held by a majority, it is likely to be the right one.  This feature is amplified in times of uncertainty; if a person has difficultly coming up with their own decision or view, they will comply with others more easily.






Cialdini recalls both incidents from the public sphere as well as experiments carried out by psychologists,who collect empirical data to show the biases asserted by individuals when placed in a group.  The strongest examples are particularly dark, describing the mass suicide of The People's Temple at Jonestown, Guyana ; where in 1977, 910 people drank from a vat of strawberry-flavoured poison and the murder of New York citizen Catherine Genovese in 1964; where 38 witnesses failed to call the emergency services.

Dr Robert Shiller

Extending this line of thought to financial markets has been the work of Robert Shiller.  In 2005, Shiller teamed up with Karl Case and surveyed new home buyers in San Francisco and found that the average person expected house prices to continue rising at a rate of 14% per year for the next decade.  Indeed, about a third of respondents expected to see a 50% rise in house value per year.  As these people were not market experts, this example shows how housing market optimism had become the socially accepted position and contributed to a housing bubble.