Zweig: Guard Against Following the Herd

Given the market’s currently stretched valuations, optimistic investors should be on their guard, says Jason Zweig of The Wall Street Journal.

Zweig discusses new findings that show how the confidence of others can influence an individual’s decision-making to a larger degree than their own can. According to a recent report in the Journal of Neuroscience, there is a particular region of the human brain that monitors how positive other people are about their choices, writes Zweig.

Daniel Campbell-Meiklejohn, a psychologist and leader of the study (conducted at the University of Sussex in the United Kingdom) explains, “The human brain has evolved with neural mechanisms to handle the uncertainty that accompanies social sources of information.” Such sensitivity to how sure other people are, he says, “can operate independently of learning from first-hand experience.”

This is particularly relevant given the pervasive confidence investors seem to be experiencing at present. According to Zweig, a survey of over 2,000 wealthy investors (released by UBS Wealth Management Americas this past week) found that 42% of investors said they were “likely to raise their exposure to stocks, up from only 9% before the election.” However, he writes, history shows that such measures of investor confidence are a “poor predictor of how well markets will perform.”

“Now more than ever,” argues Zweig, “you should take extra risk only because your own rigorous analysis leads you to conclude that it’s a good idea, not because other folks think it is.”