Funny Brains & Money Brains
How others influence your finances
Look at this line. Got it?
Now look at these lines, A B and C.
Can you tell which of the three lines matches the first one?
It’s not going to be difficult to crack this code, but what if someone else told you that line B matched the first.
Then, another person told, you the same. Then again, and again.
How would you feel?
Would you trust your own eyes…Or would you go along with the group?
We’re talking about this guy and his lines — which is a hugely informative psychological experiment— and it helps explain how completely normal people, with awareness and intelligence, end up making terrible financial decisions.
In 1951, psychologist Solomon Asch ran a series of experiments that would become legendary in social psychology.
Here’s how it worked:
A participant was placed in a room with several other people. What the participant didn’t know was that everyone else in the room was secretly working with the researcher.
They were actors (not like Tom Cruise or Meryl Streep, but confederates in the experiment).
The group was shown two cards:
One card with a single line.
Another card with three lines labeled A, B, and C.
The task was to say out loud which of the three lines matches the single line in length.
Not hard.
When people answered alone, they got it right almost 100% of the time.
But here’s where it gets interesting.
In certain rounds, all the actors deliberately gave the wrong answer.
And when it was finally the real participant’s turn?
About 75% of participants conformed at least once — even though the correct answer was obvious.
Let that sink in.
These weren’t people that had a line measuring disability. They were regular, adults, that could tell which two lines were the same length. But they still got it wrong 3 out of 4 times.
Solomon Asch had some theories on what was happening with the participants. He believed people were lying from what’s called, Normative and Informational Influences. Essentially, people didn't want to look dumb or be rejected socially, and so they would convince themselves that they were wrong. So the original hypothesis was that the unknowing participants in the study who answered incorrectly were knowingly lying about their answer in order to fit in.
Remember in 1951 technology was limited, but in the mid 1980s fMRI machines were gaining commercial use. A new set of researchers replicated the experiments and looked at the brain scans of the participants… Some interesting results came out of it.
Here's a quick detour on brains. Different brain regions are responsible for various
functions. For example, when a person is lying, it requires thought, contemplation, and intellectualization. This is mostly processed in the prefrontal cortex (PFC) region of the brain, as that's where logical thought occurs.
However, sensory perception takes place in a different part of the brain (the visual cortex, located in the occipital lobe at the back of the brain). The reason fMRI machines are useful in this is when running participants brain scans during the experiment, scientists and researchers can see which regions of the participants’ brains were firing, which indicated if a person was lying or if they were perceiving the wrong answer as correct.
And what did the results show? The part of the participant’s brains that processed visual perception were firing more than the prefrontal cortex. This means that people were literally seeing the world differently when they were exposed to others and influenced by them.
Now let's take a look and see where money enters the picture.
Imagine this:
You start hearing that “everyone” is investing in something.Your coworkers are talking about it. Financial influencers are hyping it on social media and YouTube.Your cousin who never invested before is suddenly giving advice.
The stock keeps going up.
You look at it and think:“This feels expensive. Or risky. Or not great.”
But everyone else seems confident.
So you follow the crowd.
That’s the Asch Effect in action.
You’re not responding to facts. You’re responding to consensus. Because our brains treat consensus as a valid data point.
And in finance, this shows up allllll over the place, such as:
1. Market Bubbles: usually the greatest risk is late in economic cycles, because that’s when everyone’s most excited, having pushed up the prices in the market. This is called “Irrational Exuberance”.
2. Panic Selling: People often sell investments when they go down, out of fear of losing everything. While individual concentrated investments can go to zero, a diversified portfolio would be much less likely to lose all its value.
3. Lifestyle Creep: It’s all too easy to earn $1000 more and spend $1010. Lifestyle creep is enabled from social comparison and wanting to keep up appearances in a peer group.
The scary part about the Asch Effect is:
· The participants weren’t incapable.
· They weren’t disadvantaged.
· They were normal.
That means this principle applies to everyone. And Just a quick reminder that you are part of everyone.
Financial mistakes usually are not about a lack of intelligence.
They’re often about social pressure., because as complex as humans can be, we’re still simple animals that are wired for belonging.
So what do we do with this?
You can’t just “turn off” conformity.
But you can design around it.
Here are a few simple strategies:
1. Make a plan
Well under half of people don’t have a financial plan nor work with a professional. While working with a professional is not always required, having a plan transports ideas from a person's mind into the world, making people more likely to follow through.
2. Tune out the noise
It’s hard to feel ignorant and outside of “the know”, but that’s actually better when it comes to making a financial plan and sticking to it. Noise makes it easy to get distracted and want to do something else.
3. Create pre-commitment rules
Decide in advance how you’ll invest.For example:“I will continued to dollar-cost average despite what I hear on the news.” or, “If a person tells me to invest in something, I need to hear what independent third-party assessments have concluded about that opportunity.”
Rules reduce emotional decision-making.
4. Use a decision-journal
This sounds unusual, but usually the best investors write down in a journal some key things:
The action you want to take
The thesis behind it
What assumptions you're using and if they're falsifiable
Price and valuation
Your expected time horizon
Your level of confidence
The Asch experiment wasn’t really about lines. It was about people’s perceptions of reality.
It showed that when enough people say something is true, our ‘reality’ changes and in finance, perception drives decisions.
The market is not just numbers. It’s human psychology, on steroids.
So next time everyone seems absolutely certain about a financial decision to get in, or out, or anything else…
Ask yourself:
Am I seeing the line clearly?
Or am I just agreeing with the room?
Sources:
Franzen A, Mader S. The power of social influence: A replication and extension of the Asch experiment. PLoS One. 2023 Nov 29;18(11):e0294325. doi: 10.1371/journal.pone.0294325. PMID: 38019779; PMCID: PMC10686423.
Source: Berns G, Chappelow J, Zink C ...
Neurobiological Correlates of Social Conformity and Independence During Mental Rotation
Biological Psychiatry, 2005; 58, 245-253
https://www.visualcapitalist.com/wp-content/uploads/2018/03/18-cognitive-bias-examples.html
https://www.investopedia.com/americans-using-a-financial-advisor-11812935,
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