You've heard a lot about turnips in the stock market. A lot of people are investing in them, and it feels like everyone's either buying or selling their stock.
You're tempted to join in because everyone else is doing it. How much should you buy? Should you sell your turnips like this famous investor or keep your stock like this group of people?
Feeling the pressure? Trying to copy others' financial decisions could be a sign of social proof!
What is it, how can it affect your financial decisions, and what can you do to avoid this trap?
What is social proof?
Social proof is the tendency to copy the actions and behavior of other people, especially when you're in an unfamiliar situation. It assumes that what other people are doing is the "correct behavior", which influences you to mimic them to fit in. For example, at a fancy dinner party, you may copy the mannerisms of other guests to avoid breaking etiquette.
Social proof can influence what you buy and your financial decisions in saving or spending money. Because you are following what everyone else is doing, you may forget to think for yourself, so understand its effects to avoid poor financial decisions!
How does it influence what you buy?
Ratings and reviews: If you see a lot of positive reviews for a product/service, you may be tempted to buy it because you believe the majority knows what's best.
Personal/famous testimony: Testimonies, especially from someone influential, can convince you that a product or service is trustworthy and of quality, so you think it validates your choice.
Best seller: A best-selling item indicates that many were satisfied with their purchase or that it has been popular for years, so you go for the trusted choice.
Limited item/edition: Many people will try to get the limited item/edition of an item, so seeing a lot of people want it convinces you that you want it too.
How does social proof influence your financial decisions?
Stock market: If you hear a lot of hype about the stock market, you may be tempted to invest (or not invest!) based on current trends.
Fear of missing out (FOMO): If you don't currently invest in the stock market, hearing that a lot of people do it and have had success may tempt you to join.
Rushed savings: During some uncertain economic shifts, people may drastically resort to saving money. You may do the same even if your personal situation doesn't call for it.
Rushed purchases/sales: You may be pressured to buy or sell quickly if everyone else is doing it all of a sudden.
How do you overcome the influences of social proof?
What can you do to keep social proof from affecting your financial decisions?
Familiarize yourself: Do some research on the current economy/stock market and the product/service you're interested in so that you know what you're getting yourself into.
Check for quality over popularity: Go for products, services, and investments that are reliable and trustworthy, not just a trend or overhyped.
Focus on what you want and need: Make purchases and investments based on what's important to you.
Give yourself time to think: Don't make huge financial decisions right away! Give yourself time to research and consider the aftermath of your decision.
Quiz: "The Golden Stock"
A new stock has become super popular on social media, earning the title "The Golden Stock" for potentially being the next big thing. You see a lot of people buying it and posting their gains online.
You've never paid attention to the stock trends, but seeing the stock jump 30% in a few days, you're tempted to join the craze.
But wait — is social proof influencing you?
What evidence do you have that this is social proof affecting your financial decision? Select all that apply:
A. There's a lot of hype surrounding this stock.
B. The stock is new.
C. You fear that you'd be missing out on a great opportunity.
D. People are posting testimonies.
Quiz
Select all evidence that social proof is affecting your financial decision:
Take Action
Back to the stock market scenario: you're tempted to join the crowd's enthusiasm in buying and selling turnips, but you make the smart choice to do some research before you decide to join. Your financial choices do not have to follow everyone else's, and you have the power to decide what's best for you.
Now, you make sure to focus on your needs to make smart financial decisions!
Make smart financial decisions by not letting social proof tell you what to do!
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