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The internet is full of sources that proclaim: “Almost everything you believed about investing is incorrect.” However, there are much less that the aim is to help you become a better investor by revealing that “much of what you think you know about yourself is inaccurate.” In this series of reports about the psychology of investing, I will take you through the journey of the greatest psychological defects that we suffer from that we make stupid mistakes in investing. This series is part of a joint investor education initiative between Safal NiveShak and DSP Mutual Fund.
A family member of mine once struggled with a stubborn stomach problem, which included constant acidity, a bloated feeling and fatigue. It was not life threatening, but it made daily life miserable. In the beginning he wiped it as stress, or too much tea and late nights, as most of us would do. But after three or four months the discomfort became impossible to ignore.
He finally decided to visit a senior doctor in the city, one with decades of experience, consultant in a top private hospital and a few celebrities and long waiting lists. As my family member later described him, the aura around him was unmistakable.
But as often happens in doctor’s visits, the consultation was firm. After a few quick questions, the doctor has prescribed an aggressive line of checks and treatment. That included an endoscopy, blood tests, ultrasound and an expensive combination of medicines. The costs and tests of the doctor, all of whom were done in his clinic, only cost almost £ 30,000.
My family member did not hesitate. He took some comfort in the high costs, assuming that they reflected the higher quality. But months passed. Despite the tests and medicines, his condition hardly improved. He was more tired and frustrated.
Out of desperation he went to another doctor. This was younger and ran a modest clinic from a small flat in a residential lane. The consultation costs were minimal. The doctor listened patiently, asked for his meals, lifestyle and work habits and suggested something completely different: a mild medicine, some changes in diet, regular exercise and the right rest. In the coming weeks his condition started to relieve slowly. And since then he does not have to return to the doctor for that problem.
Looking back, he admitted what embarrassed him with the first doctor. He had ignored his own doubts, simply because the status of the first doctor silent him. The Aura of Authority made him undoubtedly. And this happens so often with all of us. We give our opinion too easily about when someone speaks with confidence and also bears a title. This could of course have been a one -off case. In things that are critical, we must always seek the guidance of a senior and experienced doctor. But the point remains that authority, when undisputed, sometimes our ability to show clearly.
What my family member suffered from in his experience with the first doctor is what psychologists call Authority bias, That is a tendency to trust or obey authority figures, even when evidence suggests otherwise.
We are actually wired in this way. For the most part of human history, authority meant surviving. If the Village Elder warned about eating a certain berry, you obeyed. When the tribal chef said the river was unsafe to cross, you listened. Obedience created order, saved time and prevented fatal mistakes. But in modern life this instinct is often wrong.
Stanley Milgram, a psychologist at Yale, recorded this brilliantly in the early sixties. He wanted to study how far people would go to obey authority, even if it clashed with their conscience. Volunteers were told that they participated in an investigation into learning. Their task was to manage electric shocks to another participant (actually an actor) every time he answered a question incorrectly.
The shocks started mildly at 15 volts, then 30, 45, and so on. But they escalated to dangerous levels, from 300 volts to 450 volts, marked with warnings such as “Danger: Serious Shock”. The actor screamed, begged and eventually fell silent. Many participants argue to stop. But when it is insisted on by the experimenter in a white laboratory jacket with sentences such as: “The experiment requires that you continue”, more than 65% of them went all the way to administering what they thought were deadly shocks.
The results were horrifying. Ordinary people, no sadists or soldiers, were willing to harm others, simply because authority instructed them. Authority not only influenced them, but it was canceled out their own judgment.
And Milgram was not only in uncovering this weakness in human behavior. Around the same time, Solomon Asch’s conformity experiments showed that people would consciously give wrong answers to simple questions, just because all others in the group (planted actors) gave the wrong answer.
In the Stanford Prison -experiment by Philip Zimbardo, the ordinary students roles, while ‘guards’ started abusing their colleagues within a few days as ‘prisoners’, simply because authority structures gave them that power.
The uncomfortable lesson in these studies is clear, namely that we humans are deeply sensitive to authority and social pressure. Even if the facts are clear, even when our conscience rebelled, authority can silence us.
Now place this insight into the world of investing. The laboratory jacket is replaced by a Star Fund manager on a business channel, a broker’s report stamped with the logo of a large bank or a charismatic CEO that delivers big promises. We investors, such as Milgram’s volunteers, often suspend our doubts because an authority speaks with conviction.
I have seen this many times up close. During the infrastructure of India of 2006-2008, for example, brokerage houses have reported reports with extremely optimistic figures. Companies show off order books worth £ 20,000 crore, £ 30,000 crore. The government had announced Billion-calling investment plans in motorways, power and airports. Shares of companies in this space had already multiplied 200-300% in a few years, but analysts full of confidence predicted another 100-200% benefit.
The reports wore daring “Koop” recommendations and target prices, making portfolios resemble future gold mines. Investors, some of them are my friends and relatives, trusted them because they came from “respected” institutions. By 2008, when the global markets crashed, projects got stuck and debts, many of these shares had lost more than 70-90%. The cracks were visible in the balance all the time, but authority had blinded us for them.
The same bias also appears in how people chase investment funds under the leadership of ‘Ster’ managers. The Halo effect ensures that investors from the past assume that there was guaranteed in the past, future success. But even the best managers perform behind, sometimes for years. The Bias Authority increases the disappointment because the expectations have not been built on the process but were built on personality.
Now for the big question: why do we even fall for it again? The simple answer is: because it feels safer.
It is easier to lose money in addition to a famous name than running the risk of being wrong itself. Trusting authority also offers shortcut. And because of the Halo effect, we assume that success means competence everywhere in one area. A fund manager who once chosen a Multibagger share must be sure the next one.
But authority bias is not only expensive in terms of money. We also stop asking the most basic questions, such as: what if this person is wrong? What are their stimuli? Would I act in the same way as this advice came from someone I didn’t know?
The danger is clear and yet rejecting all authority is equally dangerous. I have seen many investors lying down the opposite extreme. They try to do everything in themselves, choose shares without understanding companies and respond emotionally to every rise and fall. In addition, they expose themselves to even greater errors. Many prejudices actually touch us the hardest when we try to navigate that completely invests completely.
The Wijzer path is not to reject authority, but to choose it wisely. For example, a good financial adviser not only tells you what to buy, but explains risks, listens to your goals and will keep you responsible for your process. A disciplined investment fund manager promises no certainty, but builds a framework that is file against cycles. A reliable mentor admits what they don’t know. These are the authorities that are worth leaning on.
Charlie Munger once said:
I never allow myself to have an opinion about something that I do not know better than she does know the opponent’s argument.
That is also a test for authority. Do they show both sides of the argument? Do they admit uncertainty? Are their stimuli tailored to yours? If so, their authority is not earned.
Behavioral research has repeatedly shown that we humans are bad in separating the authority of truth. We confuse trust with competence. But investing, just like life, does not reward blind obedience. It rewards process, patience and humility. It doesn’t matter the market who you followed. It only indicates whether your reasoning lasts.
So the next time you notice that you nod to a convincing fund manager or you feel reassured by a shiny report, pause. Ask yourself: would I make the same decision if this advice came from an unknown person? And if I can’t make it myself, who is the right authority that I can trust?
Authority bias will always attract us. It is part of being human. But consciousness gives us the chance to take a step back, ask better questions and to support where it is earned, not where it is projected alone.
Safeguard: This article is published as part of a joint investor education initiative between Safal NiveShak and DSP Mutual Fund. All investment investors must go through a one-off KYC process (Know Your Customer). Investors may only deal with registered investment funds (‘RMF’). For more information about KYC, RMF & Procedure, visit/ repair complaints dspim.com/ieid. Investment investments are subject to market risks, read all schedule -related documents carefully.
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