Sheep Mentality

Last Saturday, the Wall Street Journal ran two excellent articles, ironically back to back, about the power of the people. The first, written by Professor Stephen Greenspan, was about the psychological components of gullibility--specifically with regard to the investment shenanigans of Bernie Madoff. The second was an excellent analysis of the publishing industry's reliance on blockbusters. In both, the role of the crowd mentality in shaping decisions is paramount and can lead to both success and failure.

We humans are an extremely social lot and it turns out that relying on the advice of friends to suggest which book to read is one thing. But when it comes to following their advice when it comes to where to park your money, friends shouldn't let friends join their investment clubs.

Greenspan was himself a victim of Madoff's Multi-billion dollar Ponzi scheme, heeding the advice and example of his sister who had invested in a hedge fund that Madoff managed. As he writes, he was swayed by his sister, their friends and the man who sold him on the investment, even though another friend at home in Colorado warned him against the investment. "The decision to invest reflected both my profound ignorance of finance, and my somewhat lazy unwillingness to remedy that ignorance," he writes. He wanted to believe that his gut instincts were right and he was excited about the prospect of parking his money in a "sure" thing.

It seems that publishers like sure things as well. Hence their recent and continuing trend to publish "copy cat" novels--books that mimic other blockbusters, regardless of their "artistic" merit. Hence the recent Dewey the cat book, a feline version of Marley & Me, that has occupied the best seller list for quite some time. Yes the writer was an unknown but let it be known she was in the right place at the right time with a variation of the right formula. "Blockbuster strategies are certainly not free of risk, but, in the long run, they beat the alternative of more balanced investment strategies," writes Anita Elberse. "That explains why, even when the book industry struggles with the effects of the economic downturn, publishing houses won't steer away from big bets."

Ironically, both investment strategies--going with the sure thing and betting on blockbusters--depend on the human penchant for sheep mentality--that is doing (and reading) what everybody else is. "Because they are inherently social, people find value in reading the same books and watching the same movies that others do," notes Elberse.

So maybe the moral of the story is to steer away from the promise of a sure thing when it comes to investing your money, especially if everyone around you is NOT, and choose from the bestseller list if you only have room in your suitcase for one book.

Or better yet, go with your gut (are you listening publishers of America?) especially when it says to stray from the tried and true.