Investors like to know someone else has purchased a stock before they will consider doing so. They want to see that others think the stock is undervalued, before they will take the plunge. If many other people are doing something, we tend to assume they know something that we don't. As a result, we are likely to mimic their actions. This concept is known as social proof.
Often, following the actions of others can save us the time of figuring out the pros and cons of whether we should do something. Often, this is useful; on the other hand, in the few times when the actions of others are incorrect, it can lead to disastrous consequences.
Cialdini describes a number of historical events and experiments that show how potent is social proof, and how it can be exploited by anyone from marketers to tv executives to cult leaders. In one striking example, a bus strike caused residents of Singapore to gather at a bus stop that happened to be outside a new bank. As the residents considered alternative means of transportation, some of them began withdrawing money from the bank. As others saw large crowds withdrawing money from this bank, they too began to do so, in the assumption that this crowd must know something they didn't. The withdrawals continued until the bank was forced to close to avoid a major crash.
Commercials will often talk about how a product is the "fastest selling", and nightclubs will often create line-ups outside even if empty inside. In this way, these marketers realize that they don't have to convince you the product is good, they instead try to convince you that other people think the product is good! As another example, laugh tracks actually make people believe tv shows are funnier; the striking thing about this example is that this occurs even though the subjects know the laugh tracks are computer-generated and false.
There are two specific conditions which make people more susceptible to using social proof to govern their actions: uncertainty and similarity. When in the company of strangers, or in a new environment, individuals are much more likely to behave as do others. Furthermore, when the others are just like them (i.e. similar race, sex, age etc.), this also increases their chances of mimicking behaviour.
Cialdini advises that readers use their judgement when they see that they are behaving in a manner that is the result of social proof. Judgement might just eliminate many of the stock price crashes and bubbles that occur with the help of social proof.
