When it comes to investment advice, should you ignore everyone and think for yourself?

Question: How can we avoid the human tendency to bandwagon?

James Surowiecki: The human tendency to bandwagon is very powerful, so one of the examples I talk about in the book, a simple example is this great experiment they did in Times Square in the ‘60’s.  They put a guy on the street corner in Times Square and they just had him gaze up at the sky, like this basically.  And they just waited to see what happened.  So, when they put one person on the street corner, maybe 5% or 10% of the pedestrians walking by would stop and be looking up at the sky.  But when they put five people on the street corner, about half of the pedestrians stopped.  And when they put eight people on the street corner, which I’ll grant you is a lot of people, but when they put eight people on the street corner, 80% of the pedestrians walking by stopped and just ended up gazing up at this empty sky. 

And that’s a classic example.  As the bandwagon starts to gather steam, it becomes more attractive.  More and more people start to get on it.  I mean, my colleague, Malcolm Gladwell’s book, “The Tipping Point,” is in some way an entire book about bandwagoning.  Now, in Malcolm’s case, he’s trying to tell you how to use the bandwagon to your benefit if you’re a marketer, or a company.  But from the perspective of collective wisdom and the collective intelligence of groups, bandwagoning is a bad thing because basically the people in the group are not really – the vast majority of them are not thinking for themselves. 

And the reason we do this, I think there are a few reasons.  I mean, one is, we learn to imitate very early on as people.  It’s the way we learn, obviously, and the other reason – one other reason we imitate is imitation is actually often very useful.  This is one of the things that we have to recognize.  Bandwagoning isn’t just about basically being cheap, it’s also about realizing that a lot of times people know stuff that’s important, that’s valuable.

And one example I use is one that is very relevant to people living in New York which is – I live in Brooklyn and in Brooklyn you have to move your car once a week for street cleaning.  Each side of the streets are cleaned once a week.  So you have to move it by 11:00 a.m.  But the other thing about New York is we have a tremendous amount of religious holidays in New York City.  So, on religious holidays you don’t have to move your car, which if you’re a driver in New York is heaven basically.  So, on any given Tuesday or Thursday, which where I live happen to be the days when you have to move your car, you never really know what the rules are.  So, what I do, I work at home and what I do – I did this yesterday, is you go outside at 10:45 and if all the cars are in the street, you basically say, “Ah, I guess street cleaning rules have been suspended, you don’t need to move your car.”  And I don’t go online, I could do that, I could call 311, or whatever, I just assume that someone in that row of cars has figure out what the rules are.  And the important thing is that it has never failed me.  It has always worked.  Now, I’m just bandwagoning, I’m just assuming that everybody else knows what’s going on.  But it works a lot of the time. 

And so there is this kind of tendency to do it.  And it’s amplified I think by a couple of things.  One is something I’ve already talked about, which is just this sense that a lot of time, if you don’t bandwagon, people start to assume that you don’t actually know what you’re doing.  So in the NASDAQ case.  If you weren’t buying NASDAQ stocks in 1999, you looked like a fool.  You looked like you had no clue what you were doing as an investor.  And so, people just do it because they want to look like they have an idea of what they’re talking about. 

The other thing that happens is, I think this is especially important inside organizations, is that if you don’t fall in line with what everybody else is saying, people start to think of you as not a team player, or they start to think of you as someone who doesn’t really “get” what’s going on.  Doesn’t really get it, doesn’t really get the organization.  And so there are all these pressures pushing people to do it. 

I think for individuals the challenge is magnified – and this gets to what you were really asking about from an investment point of view.  The challenge is actually magnified by the fact that I think there is actually too much information available to people.  Now, it doesn’t really make any sense, you know, from any perspective the more information people have, the better their judgment should be basically.  But I think that, especially in the marketplace, when it comes to investing,  one of the big problems is that there is a tremendous amount of information available, not just about the fundamental reality of the economy, whatever that is.  There is also a tremendous amount of information available about what other people think about the fundamental reality of the economy, right?  We are bombarded in a way investors have never been before with the opinions of others.  So, the example I remember I wrote a piece a long time ago when the bubble was bursting, the stock market bubble was bursting, about CNBC.  Which, you know, I’ve watched anyways, but there’s no doubt but that the coverage of the market that they provide.  That is to say, not of the economy, but of the market, especially during times of crisis or times of euphoria, just amplifies what’s going on because – the example I always use is, if you go buy a television set, which is an example of a market transaction.  When you go buy a television set, you do research, maybe read about what a good TV set is and blah, blah, blah.  But when you go to buy the TV set, and the guy is trying to sell you the set, but you basically sit and you think to yourself, will this satisfy my needs, is it da, da, da, da.  With investing, it’s like you’re trying to do that while people are yelling at you constantly.  The television set is a buy, no, it’s a sell, it’s da, da, da, da, da.  It’s very hard to think for yourself.  It’s very, very hard. 

Now, does that mean you should just ignore everything else?  Well, on some level I think we’d all be better off if individuals did that.  It’s hard to do that as an individual, but I do think it is crucial to limit your exposure to the kind of day-to-day fluctuations of the market.  It’s really crucial to limit your exposure to the endless flow of news because one of the things that the media tends to do, just by its nature is exaggerate the importance of any one piece of news.  And so, I think that’s a really huge thing as an individual investor.  To the extent that you can remove yourself from the day-to-day flow, you’re probably going to be better off. 

Question: What does this mean for consumers of information?

James Surowiecki: I think the idea is that you need to be a better and more rigorous consumer of information.  Both in terms of the diversity of the sources you access and then also the type, in the sense of, again, you want to try to look more at fundamentals rather than the day to day movement of the market. 

Having said that, it’s not obvious to me that individual investors should be in the market on an individual stock basis or to some extent maybe even in an individual mutual fund basis at all.  That actually as difficult as it is to do, psychologically and difficult has it has been to do over the last year and a-half, that indexing is probably one of the better strategies.  Most individual investors should follow.  I’m not saying all, I think there is an argument for the ability of certain mutual fund managers to out perform, but it’s very hard if you’re an individual investor to not get caught up in the up and down movements of the market. 

You know, actually they do these great – they’ve done these studies – well, not actually great, they’re actually quite depressing, but these studies of the S&P500 has risen, I don’t know, whatever it is, 9% a year, whatever it is, over the last 15 years.  Whatever the number are.  But the average investor’s return over that period is much, much smaller because the average investor is jumping into the market when it starts to get more expensive and jumping out of the market when it gets cheaper, and you know this psychologically.  Just think about how hard it was in March of ’09, when the S&P was at whatever it was-- 680 or something like that.  Nobody wanted to buy stocks then.  But that’s the time to get in basically.  And so that I think is a big challenge. 

Recorded on January 15, 2010