Social Proof and Your Money

Written by Kyle J Christensen, CFP, March 21, 2023

Let’s face the truth. We are creatures that like to be in a herd. No! I’m not saying we love big lines at amusement parks or to get into the restroom, but all-in-all, we seek the comfort of knowing that we’re doing “what everyone else is doing”. Or at least, most of everyone else.  

As James Clear talks about in Atomic Habits, we have it ingrained in our very nature, after millennia of understanding that if we were ever cast out of the village, we were essentially sentenced to our death. So, whenever we are thinking of doing something, we look around to see what “everyone else” is doing.  

In many aspects of life, this can be a good thing. For example, if you’re traveling in a foreign country and you aren’t familiar with which way the traffic goes, you can look around and see what everyone else is doing, and probably figure out what’s the right way to go. You might see what people are wearing and figure out what the right type of clothing is to wear. In general, we benefit from this natural tendency. However, sometimes it gets us into trouble.

Social Scientists, such as Robert Cialdini, PhD (best-selling author of Influence: The Psychology of Persuasion), call this “Social Proof” or “automatic pilot”. Others refer to it as “herd mentality” or “following the crowd”. According to Cialdini, there are a few triggers that cause us to want to follow the crowd. “In general, when we are unsure of ourselves, when the situation is unclear or ambiguous, when uncertainty reigns, we are most likely to look to and accept the actions of others as correct.”

So, what could be wrong with that ingrained mechanism we all have within us? Cialdini explains it this way: “First, we seem to assume that if a lot of people are doing the same thing, they must know something we don’t. Especially when we are uncertain, we are willing to place an enormous amount of trust in the collective knowledge of the crowd. Second, quite frequently the crowd is mistaken because they are not acting on the basis of any superior information but are reacting, themselves, to the principle of social proof.” In other words, oftentimes, it’s “the blind leading the blind”. Cialdini calls this phenomena “pluralistic ignorance”.  

I believe that in no place is the issue of Social Proof more prevalent than in the financial world. First, there is an extreme lack of financial education in our formal education system, which I find very interesting and sad, being that 100% of everyone has to deal with personal finances. However, because of the people/institutions that basically control the entire narrative surrounding personal finances (namely, Wall Street and the financial institutions themselves), I would be seriously concerned about the type of information that would be propagated in the school system if they tried to implement financial courses into it. There’s no way the most financially powerful wouldn’t seize that opportunity (note: they already dominate the narrative with the little “financial education” that is provided in schools).  

Why is this such a bad thing when it comes to finances? Well, to put it plainly, it’s because the crowd is going to fail financially. The crowd is going to become completely financially dependent on government programs, such as Social Security, Medicare, and Medicaid. Don’t believe me? According to The Retirement Confidence Survey from 2018 (EBRI and Greenwald & Associates), 67% of current retirees state that Social Security retirement income is “a major source of income”. In other words, it’s what they live on. It’s how they survive financially. That’s more than two-third’s of the entire retired population in the United States! I could provide numerous other empirical evidences that “the crowd” has it wrong when it comes to finances, but I don’t believe that would be necessary. All I have to do is ask you this, “What percentage of the population do you believe will become completely financially free at any point in time in their lives (meaning, they don’t depend on Social Security retirement income at all, or Medicare, or any other social welfare program)?” I’m sure your answer is, “Very few people will be in that situation.”  If we do what the crowd does, and expect a different result from what the crowd is going to get, what do we call that? 

Cialdini sums up the issue quite nicely by saying, “the problem comes when we begin responding to social proof in such a mindless and reflexive way that we can be fooled by partial or fake evidence.”

How can we turn off this natural tendency when it comes to things like personal finances? How can we prevent ourselves from mindlessly following the crowd or seeking comfort in the crowd and ending up with the same results they are going to get? “Our best defence,” according to Cialdini, “is to recognize when the data are in error. If we can become sensitive to situations where the social-proof automatic pilot is working with inaccurate information, we can disengage the mechanism and grasp the controls when we need to.”

What “data” is he talking about? Is he talking about the numbers that are put into the financial calculators? Or could it be something else, even the foundational philosophy that is simply accepted as common financial knowledge (or what I call “conventional wisdom”)? What if it’s both?

Where do most people look for answers when it comes to almost anything nowadays? They look to Google. That’s their “research”. What’s wrong with that? Nothing, other than the fact that there isn’t anything on Google that filters out false or manipulative information. In fact, that’s what “algorithms” are. The algorithms that Google uses in their systems are designed to manipulate the types of search results they provide specifically to you. Here’s another thing to keep in mind, most people don’t ever look beyond the first page of results when they search for something. So, that should cause us to ask, “How does a search result end up on the first page?” It’s pay to play. Businesses and financial institutions know these statistics, so, they pay whatever is necessary in order for their answers, the ones they want you to receive, to be on the first page of results. Our desire to search things on Google is a perfect example of Social Proof. It’s also a perfect example of how easily we can be manipulated into doing exactly what financial institutions want us to do. They make it seem like the crowd is doing it, and that the results will somehow be what we want, even though the actual evidence demonstrates otherwise.

What’s your best defense? Principles. I know, I sound like a broken record by now, but it’s true, principles are your best defense. Why? Because they alert us internally when something doesn’t match up with our principles. For example, if you were on the street downtown and someone came up to you and said, “Would you like a free flower?” Your immediate internal response will be “Nothing is truly free.” Sure, you can choose not to listen to that small voice inside, and act against it, but it’s almost always there telling you that “Nothing is really free.” The crowd makes it even easier to ignore that small voice telling you nothing is free. Imagine that same situation, someone offers you a free flower. You look around and everyone else around you also has a flower they are holding. So, that gives you comfort, and makes accepting the “free flower” almost irresistible. Does the principle that “nothing is truly free” change just because more people are accepting the flower? No. Principles don’t change. Still, nothing is really free. It just makes it more difficult to say no.  

Your best defense is to listen to and follow the principles you already know to be right and true. I’m not saying that you shouldn’t ever accept something that is said to be free (such as a plate of cookies from your neighbor). But, you should at least start to question “free” when it comes to extremely important things, like your financial future. You should definitely question following the crowd when it comes to money. If you want to be financially free, you don’t want to do what the crowd is doing.

Here’s a reminder of some of the financial principles that should help you maintain a solid defense against the mechanism of Social Proof when it comes to your money:

  • Work – “Nothing ever comes to one that is worth having, except as a result of hard work.” – Booker T. Washington (Up From Slavery)
  • Knowledge – “If the investor is uneducated, anything he or she invests in will be risky.” – Robert Kiyosaki (Who Took My Money)
  • Control – “Most millionaires understand what the stock market is and what it is not – it is not something that an individual can control or influence. But most millionaires have a lot of control and influence over their own private businesses, their medical practices, and their law firms…” – Thomas Stanley, PhD (The Millionaire Mind)
  • Responsibility – “Success springs not from some new-fangled fad, paradigm, process, or program but from the willingness of [people] to embrace full accountability for the results they seek.” Connors, Smith and Hickman (The Oz Principle)

I hope this serves as a good reminder and helps you understand how and why we have an innate desire to follow the crowd. As I said, in many things in life, following the crowd may serve it’s purpose and keep us safe, but when it comes to most-things-financial, seeking “Social Proof” can be very misleading. Clearly identifying and having the courage to follow our principles will help us avoid falling into the same pits that most will find themselves in financially.