When Walt Disney opened his first theme park in 1955, he had a problem: Families all over America were coming to Disneyland, but they left as soon as they went on all the rides they planned to go on.
Walt needed to find a way to keep families at his theme park, or else he would take a hit in opportunity costs.
That's when his team came up with the idea of having a fireworks show at the end of every day so families would have something to look forward to. The plan worked. Families started staying in the park longer, as word-of-mouth spread about the show.
More than 60 years later, you can still see this herd mentality in action at Disney parks all over the world. Herd mentality or groupthink is an interesting phenomenon that describes how people can be influenced by their peers to adopt certain behaviors on a largely emotional, rather than rational, basis.
Here's another example. A study on eating habits found that, on average, if you dine with one other person you will eat about 35% more than if you ate alone.
If you're with a group of four other people, you eat about 75% more. And groups of 7 or more eat 96% more than if they were alone.
The reason you eat more when you're with friends is the same reason you rush to buy the latest "hot" stock or the newest iPhone. Groupthink leads to questionable decisions because it encourages members of the group to ignore possible problems with the group's decisions and discount the opinions of outsiders.
There's a great book that talks about groupthink called The Little Book of Behavioral Investing by James Montier. Each chapter breaks down different behavioral glitches that cause you to make poor investment choices.
In chapter 14, Montier explains the dangers of groupthink and the eight symptoms typically found when groupthink is present.
Do any of these sound familiar? Look no further than politics and you'll see almost all these symptoms at play.
So how do you break free from the herd?
"It isn't easy being a contrarian," says Montier. "Make no mistake about it, even the very best investors have to overcome the demon of conformity. Overcoming this demon effectively requires three elements."
Montier says that only by mastering these three elements will you be able to stand against the herd and reap investment returns.
One theme that comes up a lot throughout the book is planning. Montier says bad decisions are usually made in the heat of the moment.
Whereas financial success almost always comes after careful preparation and pre-commitment to a clear plan. Investing is no different than writing a grocery list before you go to the store. You do this to curb impulse buys.
In addition to Montier's advice, I'll offer you a few more tips to help you escape herd mentality:
Try to seek out alternative viewpoints that disagree with your own.Do as Charlie Munger says and "invert, always invert." Look at your ideas from the other side to better understand your own incentives.Understand the concept of mean reversion and the fact that investments can't grow forever.Write down your reasons for making an investment decision in the first place and review periodically to see if things have changed.There are countless examples of herd mentality in everyday life and there are several ways you can fight it.
Step one is knowing it exists; step two is following Montier's three tips.
To a richer life,
- Nilus Mattive
Editor, The Rich Life Roadmap The Daily Reckoning