{"id":8782,"date":"2020-12-09T00:01:08","date_gmt":"2020-12-09T05:01:08","guid":{"rendered":"http:\/\/www.jasonapollovoss.local\/?p=8782"},"modified":"2020-12-08T15:15:59","modified_gmt":"2020-12-08T20:15:59","slug":"a-theory-of-behavioral-finance-assumption-4-sociological-factors","status":"publish","type":"post","link":"https:\/\/jasonapollovoss.com\/web\/2020\/12\/09\/a-theory-of-behavioral-finance-assumption-4-sociological-factors\/","title":{"rendered":"A Theory of Behavioral Finance \u2013 Assumption 4 \u2013 Sociological Factors"},"content":{"rendered":"

Over the last several weeks we have been exploring A Theory of Behavioral Finance<\/a><\/u>. So, far I have provided a high-level overview of the theory<\/a><\/u>, as well as a discussion of two of the parents of behavioral bias: biology<\/a><\/u> and psychology<\/a><\/u>. In this article I discuss the sociological factors that lead to our errors in judgement.<\/span><\/p>\n

For convenience, here are the sociological factors that I outlined previously:<\/span><\/p>\n

 <\/p>\n

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  1. Sociological factors affecting human behavior include:<\/span>\n
      \n
    1. Safety<\/span><\/li>\n
    2. Group feedback that is either positive or negative about attitudes, behaviors, and choices<\/span><\/li>\n<\/ol>\n<\/li>\n<\/ol>\n

       <\/p>\n

      Why Sociology is Important for Understanding Bias<\/strong><\/span><\/p>\n

      It should come as no surprise that most people care about what others think of them. Most people also are concerned with how well they fit in with groups. Why?<\/span><\/p>\n

      It is easy to imagine a time in the distant past when people survived the rigors of nature \u2013 unpredictable weather, finding food, defending against violence \u2013 because of safety in numbers. Standing alone against the world was nigh impossible in our ancient past. Surely affiliation with a group of people increased the likelihood of survival. While seemingly obvious, this idea remained hidden in the shadow cast by the light of Darwin\u2019s evolutionary theory for almost a hundred years. Why would I cooperate when I need to be selfish to survive?<\/span><\/p>\n

      That cooperation is important for survival is supported by evolutionary biologists who have demonstrated this idea mathematically. Pioneering work in 1964 by Hamilton provided key insights as to why individuals\u2019 ideas of survival of the fittest was not solely a selfish-impulse.[1]<\/span><\/a> Specifically, his work found that organisms do not reproduce, genes do. Genes that are shaped by a need to survive can do so in two ways: 1) an organism can reproduce itself by passing its genes to its offspring; or 2) it can help other organisms that share its genes, such as its relatives. Subsequent researchers over the decades continue to affirm these findings, as well as that cooperation is key to survival.<\/span><\/p>\n

      A modern investing education usually includes a short detour into game theory. Typically, what people remember after this diversion is the Prisoners\u2019 Dilemma. Here, co-conspiring criminals facing prosecution \u201cwin\u201d by selling out their partner in crime and labeling them as the primary instigator. Yet, as I have written elsewhere this strategy only holds in a very limited set of circumstances and that cooperation is almost always a better strategy<\/a>. Other game theorists have researched and found the same thing. For example, Nowak and Sigmund found that, \u201cCooperation pays because it confers the image of a valuable community member to the cooperating individual.\u201d[2]<\/span><\/a> Their work with computer simulations finds, \u201cthe emergence of indirect reciprocity was a decisive step for the evolution of human species.\u201d[3]<\/span><\/a><\/span><\/p>\n

      In summary, the survival of the species depends, in part, on how well groups perform vs. nature. Group performance, in turn, depends on how well the members of the group work together and how they fit together.<\/span><\/p>\n

      Finally, that belonging to a group is important to people is also made obvious when you consider the way that we punish people for violating the laws or norms of a group. In short, we punish people by pushing them further away from the group. A violation of family norms can result in being \u201csent to our room,\u201d or if the violation is worse, in \u201cgrounding.\u201d Here the misbehaving child is cleaved off from the group temporarily.<\/span><\/p>\n

      Within society people who violate the law severely enough are carved out from society and sent to prison. Violations within prison can lead to solitary confinement, which many consider a truly severe punishment. Some even label solitary confinement as inhumane which is strong evidence that group affiliation is important to people.<\/span><\/p>\n

      Proof that we are social creatures is that solitary confinement has profound effects on our biological and psychological health. Solitary confinement is associated with a 26% increased risk of premature death stemming from our stress response which dumps cortisol into our system and increases blood pressure and inflammation.[4]<\/span><\/a> It is also well-known that increased isolation increases our risk for suicide.[5]<\/span><\/a> Long-term solitary confinement leads to very strange effects such as the inability to recognize faces, and to learn new things due to the damage it does to the hippocampus.[6]<\/span><\/a><\/span><\/p>\n

      Closer to home, and here I am talking about at investment firms, those that fail to thrive within the culture of their firms either leave or are eventually fired. Many investment organizations spend large amounts of time trying to identify the type of culture they want at their firms, and then they actively hire people in conformity with their culture. This is verified by a perusal of one of the investment industry\u2019s leading consultancies Focus Consulting Group\u2019s \u201cWritings\u201d section of its website.[7]<\/span><\/a> Their site features 5 whitepapers on culture, as well as 13 articles just on its main page. Additionally, the titles of these writings are telling, too:<\/span><\/p>\n

       <\/p>\n