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Electrocution, brutal guards, and smashed-up cars – Three psychological studies all investors can learn from

Stanley Milgram: Behavioural Study of Obedience

Background

This famous study has been repeated worldwide since its initial completion in 1963. Stanley Milgram wanted to see if conformity was an individual trait or if it was situational. To test this, a sample of 40 males from the New Haven area were told by an authority figure to deliver electric shocks to what the participants believed was another person if they got an answer wrong. This was because the participants were told that the study was testing learning through electrocution.

Results

Prior to the study, Milgram asked fourteen students how many of the sample they believed would deliver a 450V shock to another person. The answer they agreed on was 3pc. A staggering 100pc of participants delivered a 300V shock, with 26 out of the 40 delivering the highest shock of 450V!

What we can learn

We can easily be led astray by authority figures, and we should be aware of this when accepting blindly an executive’s explanation of events. Instead, we should question the facts and not take the easy route.

C Haney and Philip Zimbardo: A study of prisoners and guards in a simulated prison

Background

The aim of the study was to see what happens when good people are put in bad places. Zimbardo wanted to know if prison brutality was due to dispositional factors or situational factors.  Participants were randomly assigned the role of prisoner or guard and 24 men were selected who had agreed they were happy to play either of the roles.

Results

The study had to be stopped early due to the ‘enthusiasm’ of the guards and the significant deterioration of the prisoners. On the second day, the prisoners rebelled and locked themselves in cells. The guards used fire extinguishers to force them out, and afterwards used verbally abusive behaviour and even forced prisoners to clean toilets with their bare hands.

What we can learn

We identify ourselves not as individuals but as members of a group. The problem is that groupthink and herd mentality is not conducive to superior investment returns! Often, dissenting opinions and being a lone wolf is financially rewarding. This means that a degree of contrarianism can be healthy for your portfolio.

E F Loftus and J C Palmer: Reconstruction of automobile destruction  

Background

The experimenters believed that the language used in eyewitness testimony could alter memory. They decided to use leading questions and test for language used to see if they could alter a group’s perception of what actually happened. To do this people were asked to estimate the speed of cars and the questions asked were the variable factor.

Results

The verb used in the question was enough to influence the speed of the car estimated. Participants in the study who were asked how fast the car was going when it “smashed” into the other car estimated 40.8mph on average, compared to 31.8mph when asked what speed the car was travelling when it “contacted”. This is a 32% difference!

What we can learn

The conclusions suggest that memory – and therefore opinions – can be altered by the language used in asking to recall information. Investors should be mindful of this when meeting with management or dialling into webcasts because overly bullish statements are likely to influence how we feel about that particular company. We need to remain objective as possible and being aware of this bias should help keep us in check.

Author Michael Taylor’s website www.shiftingshares.com contains numerous tutorials on how to trade and invest as well as his free book – ‘How to Make Six Figures in Stocks’.

Valuethemarkets.com and Dynamic Investor Relations Ltd are not responsible for the content or accuracy of this article.  News and research are not recommendations to deal, and investments may fall in value so that you could lose some or all of your investment. Past performance is not an indicator of future performance.

  • Michael Taylor does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the piece.
  • Michael Taylor has not been paid to produce this piece by the company or companies mentioned above.
  • Dynamic Investor Relations Ltd, the owner of ValueTheMarkets.com, has not been paid for the production of this piece by the company or companies mentioned above.

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