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119

Individual Group Group Group 10

Individual Group 10

Group Grouj:

.5 6

Source: Figures from pp. 208-209, in Social Psychology by Muzafer Sherif and Carolyn W. Sherif. Copyright © 1969 by Muzafer Sherif and Carolyn W. Sherif. Reprinted by permission of Addison-Wesley Educational Publishers, Inc.

how easily people are drawn together under conditions of uncertainty and even mild anxiety.

An excellent demonstration was devised by psychologist Muzafer Sherif. Sherif took advantage of the little-lmown auto-kinetic light phenomenon. A stationary pinpoint of light beamed in a darkened room for a few seconds actually appears to move. Sherif asked his subjects to calculate the extent of the perceived movement as carefully as possible. With no reference points upon which to anchor judgment in tlie blackened room, individuals gave answers ranging from a few inches to eighty feet-the latter subject believing he was in a gymnasium rather than a small room.

After 100 trial sets, Sherif charted the median guess of each subject. Figure 16-1 shows that it ranged from 1 to over 8 inches (as the hne on the extreme left of both charts indicates). However when subjects were brought together, the judgments converged. Figure 16-1 panel a indicates the amount of convergence in each succeeding 100 tests with two people present; Figure 16-1 panel b with three. In the latter case, from individual medians varying from under an inch to almost 8 inches, the groups convergence by the third 100-set test moved to slightly over 2 inches.

Sherif added another variable by including a confederate. If the subject estimated the light moved 20 inches, the confederate might estimate

Figure 16-1

Convergence of Opinion in Light-Movement Experiment



How Not to Get Rich

Some readers will quite naturally ask if the strange behaviors viewed in this chapter arent just anomalies. "Tme," they might say, "Mackay and Le Bon, although insightful on the behavior of crowds, were, after all, nothing more than keen observers. While Leon Festingers Theory of Social Reality and other research on group behavior are interesting, is there any evidence that they really work?" In fact, this has always been the economists chief dispute with the psychologist. "Your hypothesis is

two. His influence was enormous. By the end of the trials, most subjects estimates came very close to those of the confederates, which remained stable throughout. Without pressure of any sort, a naive subjects judgment could be shifted as much as 80%!

Writing of these experiments, psychologist William Samuels noted:

The majority of subjects in such studies indicate little awareness that their perceptions have been manipulated by the estimates of others, for they maintain that they had previously made their own estimates before the others spoke. The influence process then may be a rather subtle phenomenon. Partners who are well liked, who have high status, who are reputed to be competent on the judgmental task, or who merely exude self-confidence when announcing their estimates are all especially effective in influencing a subjects personal norm of movements.*

Because denizens of the stock market eat uncertainty for breakfast, opinions frequentiy move toward a consensus, and as in the auto-kinetic light experiment, usually toward the most authoritative sounding or outspoken points of view available-those of the experts. Then throw in anxiety, another powerful force leading toward consensus. The stock market is uncertain and difficult during the best of times, and in its worst moments can induce first-rate terror. People find it natural under such circumstances to take comfort and security in the opinions of savvy, smart money. Small wonder that the consensus of the many looks like refuge, rather than a trap.

Earlier, we saw just how elusive the anchor of objective reality-and concepts of value based on it-actually are. It is not su rising, then, that when reality retumed, speculators dashed frantically down the streets of Moscow a few years back, or down Exchange Alley, where "South Sea" shares were traded, two and a half centuries earlier.



interesting, but how widely does it apply?" In short, "Wheres the beef?" Lets look at this question through the perspective of investor reaction to initial public offerings (IPOs).

Unfortunately, more knowledgeable investors or no, the perfecdy rational person is also not likely to be found in the American IPO markets. These markets too have had periods of euphoria, followed by panics and crashes.

Since the 1960s alone, no fewer than four major IPO bubbles have puffed up and popped, each reaching levels of crowd madness comparable to any in the past. Perhaps this area of what they would surely have regarded as "crowd folly" would have attracted Mackay and Le Bon the most. Mackay would have been fascinated by how the crowd, reinforced by expert thinking, could time and again be stampeded into paying ridiculous prices for companies of little value, only to watch the subsequent panic and freefall. Le Bon would be intrigued by the power of the image that seized expert and average investor alike, and resulted in the same disastrous mistakes only a few years apart.

Each new issue has some cutting edge product or service absolutely guaranteed to coin money. In the IPO market of the early eighties, one of the captivating images was that of new pharmaceutical and odier products that would come from genetic engineering. On October 14, 1980, Genentech, then a four-year-old biotechnology company, went public. In an unprecedented 20-minute trading spree, its stock soared from $35 to $89 a share, setting a record for the fastest per-share increase in Wall Street history. Five months later, Cetus, the oldest biotech concern, set another all-time IPO record by raising $107 million. People invested more than $3 billion in genetic engineering research during this pjriod. Investor enthusiasm still continues 17 years later, even though product pickings and market gains have been meager to date. Laboratory breakthroughs do not easily translate into salable products.

But if youre on a roll, who cares whats real and whats puff? People wear blinders against the enormous risks IPOs represent. The Value Line New Issue Survey analyzed a group of proposed IPOs and found that many were start-ups, perhaps 95% dream and 5% product. The survey also found that quite a few had only one or two full-time employees (some had none). The majority attempted to go public with absolutely no earnings at 20 to 100 times their book value prior to the offering. Curiously, most people who bought these issues could pass a Breathalyzer.

Did these folks even care what price they paid for a piece of the action? Apparently not. Recent work done by Robert Shiller, a respected behavioral economist at Yale, shows that if an investor wanted to buy a hundred shares of a company (say at $10), it didnt matter to him ifthe



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