Monday, March 16, 2009

Crowd Behavior, Social Networking and financial Decisions ..

Majority of our decisions are based on how others are doing it. Crowd behavior gets mostly influenced by the social network one maintains. Most of the people invest in stocks as his neighbor is investing and making money in it. Most of the people invest their hard earned money in risky trades without any knowledge of market, As Shankar Sharma of ‘First Global’ gives the analogy of a revolver with only one bullet in it, and the investor is asked that he will earn a million if he tries it on himself, few people might get richer in such games but end of the day more people shoot themselves rather than earning the money. The probability of becoming a millionaire is getting reduced by every trial and the rule of the games also keeps changing. Nobody knows if there is only one bullet in the gun.

Social networking is giving way to a regular crowd behavior pattern which is very prominent in many ways: -

  1. Increased Information Levels: - Social networking keeps people informed about others and leads to an increasingly informed society. Such level of information might not be very useful for all.
  2. Comparisons in Society: - Increased information about friends and peers leads way to comparison of decisions, similarity in life style and even peer pressure at times.
  3. Peer Pressure: - (From my earlier Blog) When we talk about the art of decision making and psychology behind it, we believe that peer pressure has the most significant influence behind our decision making. We may live our own life but the rules of the life are mostly defined by the people with whom we work or study. The reason is simple, we spend a significantly high portion of our time with them and hence their personalities and reactions affect our decision making process. The more important the decision, the more is the peer pressure. Infact even the decision of selecting a job or going for higher studies is sometimes influenced by the peer pressure. People constantly fear that they will be judged by other people on the basis of their decision.
  4. Financial Decision Making: -Financial success of peers and friends whom a person can easily associate in his network motivates other people to take similar risk or even at times more risk than a person can actually afford. Social networking thus makes you believe that you can also achieve the similar level of success in financial decision making.
  5. Incentives and Recognition: - Social networking also prompts a person to take increased risks as the society can make a hero out of him if he succeeds in his plans and financial decision making. The improved recognition in the society acts as a big incentive in making financial choices for a person.

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