Behavioral finance FAQ / Glossary (Peer)

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Dates of related message(s)in the
Behavioral-Finance group (*):
Year/month, d: developed/ discussed,
i: incidental

Peer influence / pressure / conformity / fear


01/1i - 03/7i - 04/1i - 05/1i -
06/11i + see consensus,

conformity, groupthink,
herding, obedience, mimicry

As the saying goes,
with some of your friends, you don't need enemies.

Definition: who are the peers?

Peer pressure is a - rather widespread -
people's tendency to conform:

* their thinking

* more important, their behavior,
             =>
to those of

  similar or close people


More precisely it is a conformity (see that word) with:

People who have common traits, or are neighbors.

We all have peers, are happy with them ...or find them a bore.


Examples of common traits or of proximities that make us peers
abound:

Identical or similar age, occupation or profession, social status,
education and cultural origin, life choices, goals, schools of thinking,
even some physical traits, and of course same firm, village or district.

See also below the case of economic experts and financial
analysts

Groups or classes of people, of which they consider to be members...

...or of which they are eager to be considered members.

Peer groups might be formal (here, membership has to be granted
by others) or informal, related to some proximity as cited above (birds
of a feather...).
.


When pressure leads to excesses

This get nearer to one another might help people to find a better way than
they would do by themselves,
but sometimes also make them feel obliged
to behave in a way they might have seen improper and harmful
if they acted alone.

Thus peer pressure, which can bolster a common
ethic,brings often conversely collective moral
transgressions, radical opinions escalations
and excessive behaviors.

Members might rationalize those transgressions by acquiring the belief that
the group has rights to be above ethics (a kind of group narcissism,
see that word).

Also, every "member" wants to show his zeal by adding gasoline to the
bonfire, which pushes more and more the whole group towards extreme
reasoning, statements, and behaviors.

This is something a bit close to the "escalation of commitment" (see
commitment)


A few precisions

Grouping ...into non-groups.


To be precise, the difference between group pressure and peer pressure is
that peer pressure can be active in physical groupes but relates also to
informal groups, virtual clans
,
as collections of people with only some
similarities.

Also to cover all cases, we could subcategorize this phenomenon in more
descriptive occurrences such as:

"Friend pressure", "colleague pressure", "neighbor pressure",
    also "class pressure".

Peers are everywhere, and have recruiters!

Or whatever other group-dependent / subjugated
   attitude,

It is sometimes disguised in a rhetoric that is reputed
positive
:loyalty, discipline, patriotism, civism, community,
identity, solidarity...

What is causing peer pressure

Saving one's skin? Or craving to be popular?


There seems to be two kind of motivations to this clannish phenomenon:
rational ones and instinctive ones.

1) To accept the peer pressure can be rational or at least
     conscious
.

In that case the goal for an individual can be

In the best case, to correct its own deficiencies, for example
    by sharing
some common wisdom.
To gain more strength , together with the other

group members, by working in the same direction,

To avoid conflicts with the group for opportunistic

or diplomatic motives, or simply because of tolerance.

To avoid to be seen as a - real or supposed - menace

for the group by a "dissident" attitude.

If your front garden is the only one unkempt, your excuses
about eco-diversity would meet deaf ears. You might be
seen, maybe rightly, as lowering the real estate value in
the block, or at least as killing its general aesthetic.

Sometimes also, more politically, to get a leading
    position  in the group.


2) To accept peer pressure can conversely be instinctive and
emotional
.
It seems then to reflect:

Fear and obedience?

A fear of peers, a counterpart of the fear that peers

feel about dissidents, as seen above.

The risk of isolation or retaliations might seem overwhelming.

To avoid conflicts might express a sense of tolerance or a wise
strategy, but also
become an obsession, a mental and moral
weakness and dismissal.


Also something close to "obedience to experts"
    (see that phrase).

The group itself can be seen as an expertise center with full
rights to decide what is good for individuals.

Also it can be dominated by a charismatic leader / guru who
inspires trust
and/or fear to members, who follow him / her
rather blindly.

Or attraction of closeness?

A feeling of belonging and closeness , even if there is
    no physical proximity

Some sensation of safety which verge on a feeling of
    invincibility
inside the group's protection.

Altogether, an obsession to win popularity (social acceptability),

or at least to feel safe and cozy within the group.

Sometimes a sentiment of pride, recognition and
   elitism
,
a paradox when it leads to abandoning some personal
   qualities

Modes...

From a small circle of peers to a mass of look-alike people.


The peer phenomenon can be seen, as regards its extent,
as something between :

Groupthink (which is usually related to limited physical groups, while
   peers can be
related to informal collections of people)

Crowd behavior or mass behavior for extensive groups, physically
   related or not.

Also class / clan (we could say population segments) behavior (dress
   code...)

For example stock investors might fall into massive herd instinct.

...And effects

Prisoner of peers.

 This consanguinity of mind leads to similar results than those
 other
collective phenomena. Those outcomes are:

Either positive (consistency of actions, simplification of analysis, boosting
   collective strength),

Or negative (lack of diversity and personal / autonomous reasoning that 

leads to one-sided, extreme, or at least simplistic opinions and behavior),

Even sometimes, in the end, disastrous.

Occurrences in economy and finance

Advices flowing from the same cask.


Peer pressure is used in advertising as a force / trick that plays on the
wish to behave like -and to commune with - other mortals, with a
preference for prestigious people.

As concerns asset markets, peer conformity is rather
frequentin stock analyst or economist circles.

It contaminates also some fund managers.

It has been observed that often, in stock research:

Most analysts publish rather similar earnings
     
previsions

This could be consistent with the EMH (see that acronym).
Except that the EMH:

1) Is about common information, not common prophecies,

2) Considers that buyers and sellers are independent and

have different estimates (if not they will never sell and 
buy to each others),

3) Only considers the resulting market price as efficient.


As a consequence, their stated opinions (recommendations 

to buy, sell or hold..) are also rather similar.

Those advices are often biased in the same direction, very
often an optimistic one (see optimism).

As if market prices were nearly always for them lower than the
"fair value"! Typical bias!

This is one of the things that can make markets poorly efficient,
here is how:


The efficient market hypothesis assumption is that operators (and their
counselors) think and act independently.

An efficient market would reflect an approximate balance between
diverging appreciations
of value, return and risk.

This assumption is not met when professionals imitate one
another
.

And this is rather frequent. Out of conformity, they often do not have
a total independence
of mind.

They often give similar previsions and recommendations.


The biased consensus, actually based on mimicry, by those "big fishes"
influences "the small fry"and orientates the market in a biased way also.


Why does this phenomenon
     contaminate professionals?

A matter of fear,
as to be labeled a traitor can shorten a career.

The motives for professionals to mimic one another's analyses, opinions
or decisions, are usually,
as seen above for peer pressure in general:

Partly "affective": a feeling of proximity,  

peppered with elitism, the emotional wish to
belong
.

This includes the fear not be liked, loved (yes, finance
professionals have their little heart ;-) or at least not to be
recognized
as a fair and reliable member, to be seen as
a dissenter.

The general idea, not to say instinctive fear, is that to go too
often against the peers' opinions is an "unpatriotic" behavior,
even a treachery.


Partly rational, as the analyst feels that his / her
    career
is at stake and fears to get into

  professional problems if s(he) is:

The only wrong one when his/her prevision fails.

His/her reputation, and maybe even his/her job would suffer.

He/she would have avoided that problem if he/she has been
wrong when everybody else was wrong.
That would have give him/her the excuse that nobody could 
do a better prediction job.

"Better be wrong with the others than be right alone".

One of the few black sheep who don't share a positive
     advice
on a stock.

That dissenting attitude would be seen as harmful by:

1) Peers who hold such a stock (or advised their clients to
    hold it),

2) The listed firm involved, which would then stop giving
     him/her any information.

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This page last update: 05/09/15

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